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Top 10 Benefits and Risks of Forming a Captive

retirement_roadMy Comments: I recently published an eBook with the title CAPTIVE WEALTH!

It explains how to use an 831(b) Captive Insurance Company to create, to grow, and to preserve wealth.

While not a simple idea, it does have the blessing of the IRS if you do it the right way, under the right circumstances. That alone makes it valuable and something to know about.

From the perspective of a successful small business owner, it allows him or her to turn a current expense item into an asset at a later date. Think about it; money spent now comes back later as an asset, which can be used many different ways. This article outlines some of the caveats you should be aware of.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | November 11, 2013

5 Tax Rules for Investors

IRS-formsMy Comments: What day is it? Yes, it’s HUMP day, especially for those whose career path involves helping others with their tax returns.

Maybe some of what you find here will help you before the next HUMP day, April 15, 2015.

by: Allan S. Roth, CPA, CFP

Compared with taxes, investing seems simple. As a CFP and CPA, a very large part of my practice is focused on maximizing tax efficiency, a strategy that often saves clients tens of thousands of dollars annually. With the higher 39.6% marginal tax bracket and the 3.8% passive income Medicare surtax in effect, tax efficiency is more important than ever.

I don’t define tax efficiency as minimizing taxes, but rather as maximizing the return after taxes. For example, clients might be able to avoid taxes by holding municipal bonds – but if they are in a low enough tax bracket, they might keep more income after taxes by owning taxable bonds.
That’s the better goal.

Tax alpha comes from several sources, including:
* Product selection
* Asset location
* Tax-loss harvesting
* Roth conversion
* Withdrawal strategies

There are some general rules to follow for each of these sources. The one big caveat, however, is that everyone’s situation is different – some clients may have huge tax-loss carryforwards, others may have nearly all of their portfolios in either taxable or tax-deferred assets. That means some circumstances require breaking these rules.


Product selection is one way to increase a portfolio’s tax efficiency. At the most basic level, picking investment products for the long run avoids turnover. Whenever a client sells an asset in a taxable account, it generates a gain or loss with taxable implications. So holding on to assets with gains defers those taxes – that’s like getting an interest-free loan from the government. Meanwhile, some investment products are more efficient than others. Mutual funds or ETFs that turn over their holdings generate taxable gains passed on to clients. According to Morningstar, the median turnover of active equity mutual funds is 49%. This creates both short-term and long-term taxable gains – and, by the way, tends to reduce returns even before these taxable consequences are factored in.

Index funds may also create turnover, particularly those with narrower focus. For example, a small-cap value index fund must sell when a company holding becomes larger or no longer meets the definition of value. Even an S&P 500 index fund must buy or sell whenever S&P makes a change.

The broadest stock index funds, such as the total U.S. or total international stock funds, have the lowest turnover and are the most tax-efficient. Even those funds, however, sometimes must sell to raise cash to buy large IPOs, such as Facebook or Twitter.


Once you help a client choose the appropriate asset allocation, location becomes critical. As a rule, tax-efficient vehicles belong in taxable accounts, while tax-inefficient vehicles belong in tax-deferred accounts, such as 401(k)s and IRAs. (Roth wrappers are much more complex – more on that in a bit.) The Asset Location Guidelines chart offers a general guideline for asset location.

There are several reasons to locate some stocks in taxable accounts. First, capital gains can be deferred indefinitely – by avoiding turnover – and possibly eliminated altogether, passing them on to clients’ heirs with a step-up in basis. And dividends are taxed at 15% for most; even for those in the 39.6% marginal tax bracket, they still carry a 20% rate – lower than ordinary income.

By contrast, holding stocks or stock funds in tax-deferred accounts has three distinct disadvantages:
* It converts long-term gains into ordinary income, which increases the tax burden.
* Because stocks tend to be faster-growing assets, they create more ordinary income later, when the required minimum distributions will be larger.
* It could cause heirs to miss out on the step-up in basis.

What does belong in tax-deferred accounts? Slower-growing assets that are taxed at the highest rates. (Think taxable bonds.) Since REIT distributions are ordinary income, they also belong in the tax-deferred accounts.

One addendum: Although I believe muni bonds are overused, they would be held in a taxable account. Clients should not own stocks in a tax-deferred account while they have munis in their taxable account, however. They would likely earn more by holding the stocks in their taxable account and taxable bonds in their IRAs, and dropping the munis altogether.

What about Roth accounts? Although this is a complex subject (and very dependent upon individual situations), a general rule of thumb is that stocks and stock funds should be held in Roth accounts only when there is no more room (from an asset location perspective) in the client’s taxable account. REITs are often properly located in Roth accounts.

There are many other variables that could change asset locations, of course, including whether a client plans to pass assets on to heirs or will sell them to raise money to live on.
asset allocation

In late 2008 and early 2009, losses were plentiful and recognizing those losses created valuable tax-loss carryforwards. While only $3,000 a year can be recognized, an unlimited amount can be carried forward to offset future gains. With U.S. stocks at an all-time high as of mid-January, harvesting those losses even now is critical as equities are sold for any reason, including rebalancing.

When doing tax-loss harvesting, be sure to watch out for wash sale rules, making sure that clients don’t buy back the same security within 30 days. To avoid having to exit stocks for a month when selling a broad stock index fund, consider buying a similar but not identical fund. For example, you could replace Vanguard Total Stock Index Fund ETF (VTI) with Schwab U.S. Broad Market ETF (SCHB). Because they follow different U.S. total stock indexes, this transaction should keep your client clear of wash sale rules.

It’s never fun to harvest losses, but the silver lining to share with clients is that bad times don’t last forever – and that there will come a time when those losses will save them a bundle.

Roth IRAs and 401(k)s can be critical elements of your clients’ portfolios. A common myth is that the Roth wrapper is better than the traditional account if the assets are held for a certain number of years. This is false. The only things that matter are the marginal tax brackets in the year of the conversion and the year of withdrawal. If the marginal tax bracket ends up higher upon withdrawal, the conversion will have been beneficial.

There’s another factor: Since no one can be certain what lawmakers will eventually do, having three pots of money – taxable, tax-deferred and in a tax-free Roth – is an important way to diversify against unpredictable politicians.

Rather than have clients contribute to a Roth wrapper, I typically have them contribute first to a traditional retirement account, and then do multiple partial Roth conversions from existing IRAs to take advantage of potential recharacterizations later on.

I consider traditional IRAs to be partnerships between the client and the government. As an example: A $100,000 IRA owned by a client in the 30% tax bracket would be 70% owned by that client; converting it to a Roth costs the client $30,000 to buy out the government’s share.

If that client does three $10,000 Roth conversions, he or she will owe $9,000 in taxes – $3,000 per conversion to buy out the government’s share. If they put each $10,000 conversion in different asset classes early in the year, they’ll have up to 15 months or (if the client files an extension) even up to 21 months to see how each performs. If, for example, the assets in one conversion tank and lose half of their value, the client can hit the undo button and recharacterize – thus having the government buy back its share at the full $3,000 original price.

Recharacterization also gives a client a chance to undo an unexpected impact from the dreaded alternative minimum tax. Tax accountants often underutilize the strategy of multiple Roth conversions – which can often be a vital part of tax planning.

When clients transition from accumulation to withdrawal modes, tax strategy continues to be critical. There is a general rule of thumb that a client should spend taxable assets first, tax-deferred assets second and Roth assets last.

It’s not a bad rule to start with, because spending down taxable assets lowers future income when clients will be withdrawing from tax-deferred accounts – which generally have a zero cost basis and generate ordinary income.

But the analysis becomes more complex if a client has an opportunity to pay taxes sooner at a lower marginal rate. If, for example, a client is retired but elects to delay Social Security until age 70 (a wise move for the healthy), a client may have more deductions than income. Thus, it would be advantageous to either take out enough money to stay within the 15% tax bracket ($72,250 for married couples filing jointly), or to do multiple Roth conversions to use up that low marginal tax rate.

From a broad perspective, advisors have a wide range of options to provide clients with tax alpha. Another example: Because most advisors don’t get to design portfolios from scratch, they wind up keeping some existing assets while building a more diversified portfolio. So clients who come to me with S&P 500 funds and want to own a broader index – but have large unrealized gains that would create a tax hit if sold – can create a total index by using a completion index fund such as an extended market index fund, which owns every U.S. stock not in the S&P 500. Just by avoiding the sale of the S&P 500 fund, the client gains a tax advantage.

In most cases, coordinating with the client’s CPA is critical. Since many CPAs do not have a strong understanding of investing, you may need to explain some of these strategies to them. Tax strategy is far from simple – yet if done right, planners can create large amounts of tax alpha for clients in any phase of life.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo., and is a CPA. He also writes for CBS MoneyWatch.com and has taught investing at three universities.

U.S. Defense Policy in the Wake of the Ukrainian Affair

FT 11FEB13My Comments: I was born in England in 1941 with bombs dropping on and around us almost daily. My father, with the Royal Tank Regiment, was across the Channel in the thick of things. Today I have memories of blasted buildings and walls standing here and there, some with staircases. My mother used to put me to bed at night under the stairs since if the building came down, I was somewhat safer.

What I see happening in the Ukraine is bringing back unpleasant memories. Since the end of the Cold War, state on state conflict has slowly faded. Some of that is simply due to modern technology and some of it because as the richest state on the planet, we’ve been handed the role of global policeman.

But two extended conflicts over the past dozen years have sapped our strength and our desire to keep order. The Russians, in their zeal to Take Back Russia, have elected to return to the solutions that were common in the last century. The question now becomes do we let them, or do we find whatever way possible to kick their ass into the 21st century?

By George Friedman | Tuesday, April 8, 2014 | Stratfor

Ever since the end of the Cold War, there has been an assumption that conventional warfare between reasonably developed nation-states had been abolished. During the 1990s, it was expected that the primary purpose of the military would be operations other than war, such as peacekeeping, disaster relief and the change of oppressive regimes. After 9/11, many began speaking of asymmetric warfare and “the long war.” Under this model, the United States would be engaged in counterterrorism activities in a broad area of the Islamic world for a very long time. Peer-to-peer conflict seemed obsolete.

There was a profoundly radical idea embedded in this line of thought. Wars between nations or dynastic powers had been a constant condition in Europe, and the rest of the world had been no less violent. Every century had had systemic wars in which the entire international system (increasingly dominated by Europe since the 16th century) had participated. In the 20th century, there were the two World Wars, in the 19th century the Napoleonic Wars, in the 18th century the Seven Years’ War, and in the 17th century the Thirty Years’ War.

Those who argued that U.S. defense policy had to shift its focus away from peer-to-peer and systemic conflict were in effect arguing that the world had entered a new era in which what had been previously commonplace would now be rare or nonexistent. What warfare there was would not involve nations but subnational groups and would not be systemic. The radical nature of this argument was rarely recognized by those who made it, and the evolving American defense policy that followed this reasoning was rarely seen as inappropriate. If the United States was going to be involved primarily in counterterrorism operations in the Islamic world for the next 50 years, we obviously needed a very different military than the one we had.

There were two reasons for this argument. Military planners are always obsessed with the war they are fighting. It is only human to see the immediate task as a permanent task. During the Cold War, it was impossible for anyone to imagine how it would end. During World War I, it was obvious that static warfare dominated by the defense was the new permanent model. That generals always fight the last war must be amended to say that generals always believe the war they are fighting is the permanent war. It is, after all, the war that was the culmination of their careers, and imagining other wars when they are fighting this one, and indeed will not be fighting future ones, appeared frivolous.

The second reason was that no nation-state was in a position to challenge the United States militarily. After the Cold War ended, the United States was in a singularly powerful position. The United States remains in a powerful position, but over time, other nations will increase their power, form alliances and coalitions and challenge the United States. No matter how benign a leading power is — and the United States is not uniquely benign — other nations will fear it, resent it or want to shame it for its behavior. The idea that other nation-states will not challenge the United States seemed plausible for the past 20 years, but the fact is that nations will pursue interests that are opposed to American interest and by definition, pose a peer-to-peer challenge. The United States is potentially overwhelmingly powerful, but that does not make it omnipotent.

Systemic vs. Asymmetric War
It must also be remembered that asymmetric warfare and operations other than war always existed between and during peer-to-peer wars and systemic wars. The British fought an asymmetric war in both Ireland and North America in the context of a peer-to-peer war with France. Germany fought an asymmetric war in Yugoslavia at the same time it fought a systemic war from 1939-1945. The United States fought asymmetric wars in the Philippines, Nicaragua, Haiti and other places between 1900-1945.

Asymmetric wars and operations other than war are far more common than peer-to-peer and systemic wars. They can appear overwhelmingly important at the time. But just as the defeat of Britain by the Americans did not destroy British power, the outcomes of asymmetric wars rarely define long-term national power and hardly ever define the international system. Asymmetric warfare is not a new style of war; it is a permanent dimension of warfare. Peer-to-peer and systemic wars are also constant features but are far less frequent. They are also far more important. For Britain, the outcome of the Napoleonic Wars was much more important than the outcome of the American Revolution. For the United States, the outcome of World Was II was far more important than its intervention in Haiti. There are a lot more asymmetric wars, but a defeat does not shift national power. If you lose a systemic war, the outcome can be catastrophic.

A military force can be shaped to fight frequent, less important engagements or rare but critical wars — ideally, it should be able to do both. But in military planning, not all wars are equally important. The war that defines power and the international system can have irreversible and catastrophic results. Asymmetric wars can cause problems and casualties, but that is a lesser mission. Military leaders and defense officials, obsessed with the moment, must bear in mind that the war currently being fought may be little remembered, the peace that is currently at hand is rarely permanent, and harboring the belief that any type of warfare has become obsolete is likely to be in error.
Ukraine drove this lesson home. There will be no war between the United States and Russia over Ukraine. The United States does not have interests there that justify a war, and neither country is in a position militarily to fight a war. The Americans are not deployed for war, and the Russians are not ready to fight the United States.

But the events in Ukraine point to some realities. First, the power of countries shifts, and the Russians had substantially increased their military capabilities since the 1990s. Second, the divergent interests between the two countries, which seemed to disappear in the 1990s, re-emerged. Third, this episode will cause each side to reconsider its military strategy and capabilities, and future crises might well lead to conventional war, nuclear weapons notwithstanding. Ukraine reminds us that peer-to-peer conflict is not inconceivable, and that a strategy and defense policy built on the assumption has little basis in reality. The human condition did not transform itself because of an interregnum in which the United States could not be challenged; the last two decades are an exception to the rule of global affairs defined by war.

U.S. national strategy must be founded on the control of the sea. The oceans protect the United States from everything but terrorism and nuclear missiles. The greatest challenge to U.S. control of the sea is hostile fleets. The best way to defeat hostile fleets is to prevent them from being built. The best way to do that is to maintain the balance of power in Eurasia. The ideal path for this is to ensure continued tensions within Eurasia so that resources are spent defending against land threats rather than building fleets. Given the inherent tensions in Eurasia, the United States needs to do nothing in most cases. In some cases it must send military or economic aid to one side or both. In other cases, it advises.

U.S. Strategy in Eurasia
The main goal here is to avoid the emergence of a regional hegemon fully secure against land threats and with the economic power to challenge the United States at sea. The U.S. strategy in World War I was to refuse to become involved until it appeared, with the abdication of the czar and increasing German aggression at sea, that the British and French might be defeated or the sea-lanes closed. At that point, the United States intervened to block German hegemony. In World War II, the United States remained out of the war until after the French collapsed and it appeared the Soviet Union would collapse — until it seemed something had to be done. Even then, it was only after Hitler’s declaration of war on the United States after the Japanese attack on Pearl Harbor that Congress approved Roosevelt’s plan to intervene militarily in continental Europe. And in spite of operations in the Mediterranean, the main U.S. thrust didn’t occur until 1944 in Normandy, after the German army had been badly weakened.

In order for this strategy, which the U.S. inherited from the British, to work, the United States needs an effective and relevant alliance structure. The balance-of-power strategy assumes that there are core allies who have an interest in aligning with the United States against regional enemies. When I say effective, I mean allies that are capable of defending themselves to a great extent. Allying with the impotent achieves little. By relevant, I mean allies that are geographically positioned to deal with particularly dangerous hegemons.

If we assume Russians to be dangerous hegemons, then the relevant allies are those on the periphery of Russia. For example, Portugal or Italy adds little weight to the equation. As to effectiveness, the allies must be willing to make major commitments to their own national defense. The American relationship in all alliances is that the outcome of conflicts must matter more to the ally than to the United States.

The point here is that NATO, which was extremely valuable during the Cold War, may not be a relevant or effective instrument in a new confrontation with the Russians. Many of the members are not geographically positioned to help, and many are not militarily effective. They cannot balance the Russians. And since the goal of an effective balance-of-power strategy is the avoidance of war while containing a rising power, the lack of an effective deterrence matters a great deal.

It is not certain by any means that Russia is the main threat to American power. Many would point to China. In my view, China’s ability to pose a naval threat to the United States is limited, for the time being, by the geography of the South and East China seas. There are a lot of choke points that can be closed. Moreover, a balance of land-based military power is difficult to imagine. But still, the basic principle I have described holds; countries such as South Korea and Japan, which have a more immediate interest in China than the United States does, are supported by the United States to contain China.

In these and other potential cases, the ultimate problem for the United States is that its engagement in Eurasia is at distance. It takes a great deal of time to deploy a technology-heavy force there, and it must be technology-heavy because U.S. forces are always outnumbered when fighting in Eurasia. The United States must have force multipliers. In many cases, the United States is not choosing the point of intervention, but a potential enemy is creating a circumstance where intervention is necessary. Therefore, it is unknown to planners where a war might be fought, and it is unknown what kind of force they will be up against. The only thing certain is that it will be far away and take a long time to build up a force. During Desert Storm, it took six months to go on the offensive.

American strategy requires a force that can project overwhelming power without massive delays. In Ukraine, for example, had the United States chosen to try to defend eastern Ukraine from Russian attack, it would have been impossible to deploy that force before the Russians took over. An offensive against the Russians in Ukraine would have been impossible. Therefore, Ukraine poses the strategic problem for the United States.

The Future of U.S. Defense Policy
The United States will face peer-to-peer or even systemic conflicts in Eurasia. The earlier the United States brings in decisive force, the lower the cost to the United States. Current conventional war-fighting strategy is not dissimilar from that of World War II: It is heavily dependent on equipment and the petroleum to power that equipment. It can take many months to field that force. That could force the United States into an offensive posture far more costly and dangerous than a defensive posture, as it did in World War II. Therefore, it is essential that the time to theater be dramatically reduced, the size of the force reduced, but the lethality, mobility and survivability dramatically increased.

It also follows that the tempo of operations be reduced. The United States has been in constant warfare since 2001. The reasons are understandable, but in a balance-of-power strategy war is the exception, not the rule. The force that could be deployed is seen as overwhelming and therefore does not have to be deployed. The allies of the United States are sufficiently motivated and capable of defending themselves. That fact deters attack by regional hegemons. There need to be layers of options between threat and war.

Defense policy must be built on three things: The United States does not know where it will fight. The United States must use war sparingly. The United States must have sufficient technology to compensate for the fact that Americans are always going to be outnumbered in Eurasia. The force that is delivered must overcome this, and it must get there fast.
Ranges of new technologies, from hypersonic missiles to electronically and mechanically enhanced infantryman, are available. But the mindset that peer-to-peer conflict has been abolished and that small unit operations in the Middle East are the permanent features of warfare prevent these new technologies from being considered. The need to rethink American strategy in the framework of the perpetual possibility of conventional war against enemies fighting on their own terrain is essential, along with an understanding that the exhaustion of the force in asymmetric warfare cannot be sustained. Losing an asymmetric war is unfortunate but tolerable. Losing a systemic war could be catastrophic. Not having to fight a war would be best.

Is Social Security Really Going Broke?

Social Security 2My Comments: Two days ago, I posted an article with 11 Tips About Social Security. Only it somehow got posted without a Title. I didn’t notice and no one called or emailed to tell me about it. Maybe the article was compelling on its own or more likely, few people pay any attention to these posts. Since then I’ve added the Title it was supposed to have.

My son argues that it really doesn’t matter how much he puts into the SSA system since by the time he arrives to collect his benefits, there will be no SSA since it will have long since run out of money.

I’ve argued again and again that it WILL be there, though probably changed somewhat. After all, it was “going broke” 25 – 30 years ago and it got fixed. All they did was delay the full retirement age. They can do that again, or increase the % of payroll that gets sent into the system.

Or maybe it’s not going broke after all, just the way it is. Here’s an article that says all the fuss and hullabaloo is a waste of time and energy. And this argument is compelling, to my mind. See what you think and let me know. Please!

Article added by Dan McGrath on April 4, 2014

There is a lot of rhetoric in the news lately about Social Security becoming insolvent as the baby boomers head towards retirement. The logic makes sense; there is a disproportionate amount of people heading towards retirement, who will be accessing the benefits provided by Social Security while having far fewer people funding the same benefits.

To complicate matters even further, the trust fund that was created at the onset of Social Security has been depleted over the years by politicians who decided to fund their own pet projects with the money that was deposited in it, instead of letting that money grow.

So, the outlook does appear to be ominous at best, especially with too many people taking, not enough people putting in, and the government withdrawing money whenever possible. But even with all of this happening, the rhetoric and the worry may be all for naught and the reason is very simple: health care.

Flying under the radar when it comes to retirement is how the rules have been changed over the course of the last 10 to 12 years, and because of these rules, the baby boomers who are in and heading towards retirement may, to their detriment, actually save Social Security for everyone else who will follow them. Unfortunately for them, there will also be a large strain placed on their financial plans moving forward and quite possibly a chance that the wealth transfer that is often mentioned will be wiped out as well.

Starting in 1993, under a simple change to the Program Operations Manual System of Social Security, it was ruled that in order to receive Social Security, a person must also accept Medicare Part A or forfeit all benefits of Social Security, meaning that those in and heading to retirement must, once eligible and accepting Social Security, accept Part A of Medicare in order to keep receiving Social Security.

Once Part A is accepted and there is no longer any credible insurance from an employer, then a retiree must also enroll into Parts B and D of Medicare or face late enrollment penalties, too. And, by the way, these late enrollment penalties are concurrent, total the length of time late and unfortunately follow for the entirety of a retiree’s life.

The other change to retirement that is creating a windfall for Social Security is the fact that Medicare is also being means-tested for Parts B and D. This means that the more income you earn, the more you will pay for this coverage. This may be the specific reason why, in 2007, the Congressional Budget Office (CBO) released the below graph detailing the impact that Medicare/Medicaid, Social Security and the budget would have on the overall U.S. economy.SSA $ 2002 to 2072

See anything in particular? Do you see how Social Security levels off after about 2029, even in the face of the rhetoric that it should open wide like a funnel?

One possible reason why this 2007 chart from the CBO depicted Social Security as leveling off in the future and not becoming a burden to the economy might just be due to the fact that 2007 was the first year that Medicare was actually means-tested. It could be just some strange coincidence, or it could be that the CBO was really trying to tell us something — that it is due to the fact that Medicare is being means-tested and that certain Medicare premiums and any surcharges are automatically deducted from any Social Security benefit you may receive.

With Medicare inflating at 6.5 percent, the lowest rate reported by the government, and Social Security’s cost of living adjustments (COLAs) only expected to be at a maximum of 2.8 percent annually for the foreseeable future, it is only a matter of time (and simple math) before it’s realized that the government’s obligation of providing Social Security benefits will be lowered drastically, all at the expense of those in and heading to retirement.

On the surface, it would appear that the deck is stacked against Social Security, but due to these simple rule changes the end is most likely not as near as the media would like to report on it. And judging by what the CBO actually told us back in 2007, the end of Social Security is probably nowhere in sight.

Please keep in mind that even though Social Security may be fine in the long run, it still doesn’t mean that people are going to receive the amount of Social Security they have been told. Because of these health costs and these rules, the Social Security benefits that a majority of retirees have and will continue to rely on will, when it comes to actual take-home income, either be stagnant, decreasing or even possibly vanishing all together.

The Hold Harmless Act will only protect people from Part B increases and is null and void for any high-income retirees, as well.

The time to create another form of guaranteed income, one that is not recognized as income by the IRS and/or Medicare, is now because what you don’t know about retirement will hurt you.

Buy Term and Invest the Difference?

Comments from me, Tony Kendzior: For many years, my primary income resulted from my license to sell life insurance, health insurance and annuities in the State of Florida. But like so much over these many years, the markets changed, the rules changed, the perception of need by consumers changed. And then came the internet.

One change that led to the headline of this article was driven by the fabulous return on investments during the years from 1987-2000. Roughly 93% of every trading day saw a positive result. Which meant that putting lots of money into a permanent life insurance policy was dumb, since you could buy term, invest the difference and come out way ahead.

Until you couldn’t. Which is what folks are facing now. My children now own the life insurance policy on my life that is essentially a term to age 120 policy. A level premium, very little cash value, but my family will get a payday to offset the fact that my savings got decimated during the 2008-2009 crash. Unless I live past 120 which means all bets are off.

by Jeff Reed on March 27, 2014

In the last year, one of the major tenets of financial planning came under fire. Studies uncovered that the 4 percent withdrawal rule for retirement may not be sustainable. As significant as that news is, perhaps the more important part of the exercise is questioning the conventional wisdom in the first place. That process leads to any number of other tried and true “rules” of financial planning that could also come into question, and maybe even be exposed as unreliable.

One that was in the news recently was the concept of “buy term and invest the difference.” This long-held belief by many CPAs and CFPs may be crumbling as retirement age is pushed further and further out for many individuals, and their term insurance expires while they still have an earned income to protect.

Truly, the Achilles heel of the strategy has always been, “What if things don’t go according to plan?” In this article, I try to answer that question.

It’s about risk management, not cash value

The historical battle lines of this issue have had the life insurance professional recommending permanent insurance on one side and the CPA or CFP recommending term insurance on the other. One of the major elements of the insurance professional’s argument has been the presence of cash value to offset premium or provide an income. But what if that is really the wrong battle? What if the real issue comes down to providing coverage with a finite termination point to cover a risk that has proven to have a duration of unknown length?

That’s really a square peg being driven into a round hole. If a more effective strategy is to match the risk profile with the right risk management tool, then we need to look at the problem completely differently. We need a risk management tool that has the ability to extend its useful life if we need it to, and at a price that is reasonable. The reality is that the best-suited product for this risk may not be term insurance. It’s simply too rigid.

The problem with averages

This issue comes up time and time again in our business. Put frankly, averages create a false sense of security. In 2013, according to Gallup’s annual Economy and Personal Finance survey, the average retirement age rose to 61, up from 57 back in 1993. Seems like a reasonable rate of increase, and today’s 45-year-old could expect, on average, to retire at age 65. The issue, however, is that means that 50 percent of current retirees, more or less, were over age 61 when they retired — some of them probably quite a bit older.

A portion of that 50 percent almost assuredly had to make some tough decisions about their life insurance coverage as they aged, particularly if their contract reached its natural expiry. So, too, will the cohort turning age 65, 20 years from now if they need to push their retirement age out beyond the norm.

Underwriting class drift

The obvious solution is to buy a new term insurance contract. Unfortunately, we all know that our clients’ health changes as they age. That exacerbates the problem with term insurance as an income protector, as just when these clients may need to make a new insurance purchase, their health may put the price out of reach, or they may not be able to qualify. How real is this issue? We pulled some data from one of our insurance companies about the changes in underwriting results as clients age.

The trend is obvious, with the percentage of applicants approved at standard rates increasing by 25 percent from age 40 to 65. This only represents applicants approved at standard or better, and there are almost assuredly a significant percentage of declines as well as clients who simply do not apply, knowing that they either can’t afford or can’t qualify for new insurance. The assumption that the client will be in the same health as they were at the time of their original underwriting and that today’s products are indicative of pricing that will be available 10, 20 or even 30 years from now is simply not realistic.

Based on the above, that is not a bet I would take, nor would most informed clients.

What’s the alternative?

This is the real question: Is there a life insurance product out there that matches this risk profile more closely than term insurance? Yes, there is, and it turns out that everybody may have been wrong about this one.

The issues with term insurance have been explored above, but what about the cash-value life insurance side of the argument? The accumulation solution works, but only if the client has the income to fund it. Logically then, it would follow that the people who successfully execute on that strategy are also likely to be retiring at or before the average retirement age. Where this issue really rears its ugly head is within a standard deviation or two of the mean, where retirement is much less secure. These clients are likely to have issues over-funding a policy on a consistent basis, or may have started to save for retirement at too-late an age to really utilize the income-generating potential of a life insurance contract. Whatever the reason, this group’s retirement is much less certain than their peers. And these people at the fat part of the bell curve need a different solution.

What they need is efficiently priced coverage that has flexible premiums and does not have a set expiration date, which sounds an awful lot like some of the efficient, low-cost insurance products discussed in previous posts. So much so, in fact, that we took a look at how that might play out by comparing the cost of term insurance versus permanent insurance utilizing low-cost permanent products that are not used to accumulate cash. Rather, they’re used to effectively match the risk we’re attempting to insure by eliminating the set expiration date of term insurance.

11 Tips to Help YOU With Social Security Benefits

SSA-image-2Comment from Tony Kendzior: I’ve been happily accepting monthly checks from the Social Security Administration now for over seven years. I don’t wonder much about it anymore; they just show up in my bank account and along with my wife’s check, make a better positive outcome for us every month.

I’m also finding ways to help individual clients optimize their benefits. It’s a function of doing the math to determine which of the 97 months you can choose to start taking your benefits. And knowing the impact of several options you have in each of those 97 months.

So my goal is to try and post something about the Social Security System at least once every week. If this is redundant, my apologies. But I never know who is reading this stuff so I just keep shoving it at you in hopes you will benefit. BTW, if you want a specific analysis for yourself, let me know. It’s free.

by: Ann Marsh / Financial Planning / Wednesday, January 22, 2014

The Social Security system may be in serious trouble but, right now, it’s still a critical source of support for clients, according to Theodore Sarenski, president of Blue Ocean Strategies Capital in Syracuse.

Sarenski started with the bad news during his presentation before CPA-planners at the Advanced Personal Financial Planning Conference sponsored by the American Institute of CPAs in Las Vegas.

Reserves for Social Security will be depleted by 2033 and, once they’re gone, incoming receipts will cover just 77% of scheduled benefits, Sarenski says. “It sounds like it’s a long time away, but it’s only 19 years.”

Trouble looms even sooner for the Social Security Disabilty reserves, which will be depleted by 2016, according to Sarenski. And, once depleted, anticipated income would cover just 80% of scheduled benefits, he adds.

For these reasons, Sarenski says, he urges caution.

“We need to be conservative, I think, in our planning,” he says. For people who are age 50 or younger, he is currently projecting they will receive 75% of their benefits.

While he holds out hope that government intervention – possibly in the form of tax increases – can provide a solution, planners still can help their clients get solid benefits from Social Security right now.

This is especially important because baby boomers, now entering their retirement years, have not been good savers, he says.

Across the U.S. workforce today, 51% of people have no private pension coverage and 34% has no retirement savings, he adds.

“So, now that we are all depressed,” he says, “what are the things that we can do for our clients?”

His advice includes the following:

Although there are exceptions, planners should urge most clients to wait to take their Social Security benefits. If they take them as soon as they can at age 62 rather than waiting until age 66, or even 70, they will receive lower monthly benefits. Planners should remind clients that Social Security is the only benefit with a built-in inflation adjustment.
“You cannot buy an annuity that has an inflation rider so it’s worth waiting” for the higher number, he says.

In some cases, it can make sense to start benefits at age 62 and then immediately suspend them – a strategy many clients are not aware of. For example, a spouse may want to start his benefits and immediately suspend in order to trigger spousal benefits for a wife who is 62 or older. He can then suspend his benefits in order to receive a higher benefit when he resumes them later. Some people take this route to reduce required minimum distributions from retirement savings.

“The closer [married couples] are in age, the better this works out,” he cautions.

However, if you do file and suspend, make sure to pay your Medicare Part B premium yourself. If you don’t, Social Security will pay that premium for you, which will reduce future benefits. “Be careful of that,” he says.

Remember that spouses need to be married for a full year to collect benefit from a spouse’s work record.


Both spouses in a couple cannot file and suspend in order to trigger benefits on each other. On the other hand, if they decided to get divorced, they could.
Planners “probably won’t get a lot of clients to do this,” Sarenski jokes.

Those already divorced must have been divorced for two years before they can collect a spousal benefit on their divorced spouse. The same goes for their exes if they want to collect on them. Benefits collected by ex-spouses do not impact the benefits due to a client’s family.

When working with clients who are much older and could lose the ability to care for themselves, those clients should appoint “representative payees” to receive funds on their behalf from the administration. That’s because Social Security does not recognize powers of attorney.

Once, Sasenski says, one of his clients had to close out a banking account that took direct deposits of Social Security checks for herself and her husband. Although she had power of attorney over her husband’s affairs, it took four months of wrangling with the Social Security Administration before she could have her husband’s check sent to her for his benefit.


Remember that, although the Social Security Administration has made a large push to get people to enroll for benefits online, anything beyond the simplest arrangements must be handled in person, at a Social Security office. The online system is not set up to handle anything anomalous.

“Someone told me here at the conference that one of their clients couldn’t apply online. Why? Because they were born on Feb. 29,” Sarenski says, and the system couldn’t recognize that leap year date.

Planners should urge all their clients to enroll online right now to receive annual Social Security statements. The administration sent out paper statements for the last time in 2010. It waited so long to move the entire operation online to ensure that people could safely and securely access their information online. Now, Sarenski says, the administration’s website is robust. But it’s important that clients check their data regularly because the government does make mistakes occasionally and the older those mistakes are, the harder they are to rectify.

For anyone wondering, Sarenski says, husbands or wives who kill their spouses can’t collect benefits on them. Neither can children who kill their parents. If someone goes to jail, any benefits that would have come due during that jail time are lost.

“But your spouse and children, as long as they are not in there with you, they can continue getting benefits,” he says.


In some situations, clients can start receiving benefits very rapidly. “There are 200 compassionate allowances,” he says. “You will get Social Security benefits within two weeks if you have one of those conditions.”

Global Markets: At A Turning Point?

My Comments: This article was published two months ago, so it is interesting to see how the ideas expressed were validated or not over February and March. At the time, the focus was a just ended and very dismal January. Everyone was asking me about the rest of the year. And I didn’t have a good answer.

All I can say is that the programs I use for investing our money, yours and mine, have the ability to move to cash on any given day, and if the trend line is negative, to use strategies that allow investors to make positive gains when the rest of the world is watching their investments decline.

What I would have you understand is that two months does not make a year. Or that what happened in 2008-2009 will not define your life if you seek good advice. If anyone would like proof of this for the seven years from January 2007 thru December 2013, let me know. I’ll email you a hypothetical that I think is outstanding.

Edmund Shing / Jan. 31, 2014

What to think about Recent Emerging Markets-Led Volatility

Wow! This has certainly been an exciting few days for global financial markets, led by sharp weakness in various Emerging Markets (stocks, bonds, currencies). Figure 1 below highlights how the Russian Ruble and Turkish Lira currencies have both suffered extensive weakness against the US dollar over the last month or so, the weakness accelerating over the last few days.

( This is a fairly long article so I invite you to CONTINUE READING HERE. )

Thought for the Week – Longevity Risk

retirement-exit-2The economy we have been experiencing since 2008 has seen historically low interest rates. It’s taken five years to recover what has been lost. We should be paying attention to some of the implications here since ignoring their impact on many of you and on me personally could be dramatic.

Think about it:

• We have an ageing Bull Market that is pushing the historical limits and looking at the next Bear.

• Clients and prospective clients are retiring and are looking for help to support a comfortable lifestyle.

• Clients no longer have the singular goal of building their wealth for future use. We’ve moved from working to earn money to making sure our money is working for us.

• Clients expect us to position their assets to provide income they won’t outlive, additional income when needed to help pay the increased cost-of-living when they become infirm; and pass a legacy to heirs who are facing an even more uncertain future and can use all the financial help they can get.

As investment advisors, we have historically faced one most significant risk….Market Risk. With diversification, asset allocation and intelligent strategies we’ve been able to help our clients overcome Market Risk and successfully build their wealth.

Today, however, there are many more risks that must be addressed. Consider, you have now retired and must live on the wealth you managed to create. Now you face Inflation Risk, Deflation Risk, Withdrawal Rate Risk, Sequence of Returns Risk, Long-term Care Risk, Regulatory Risk, Taxation Risk and the granddaddy of them all, Longevity Risk.

Longevity Risk… the risk of outliving our income. But that’s not all. The longer we live, the more opportunities for market losses, the greater the possibilities of running out of money, the more significant the Sequence of Return issue and the greater the likelihood of needing long-term care.

The most important strategy therefore is to remove the Longevity Risk from a retiree’s portfolio so that you can eliminate, or significantly reduce, most or all the rest. Now we can concentrate on continuing to help clients earn a respectable return on their investments.

Stock markets and other investment instruments are never expected to specifically address these issues. And many successful individuals will die poor when their investments are unable to meet all of their requirements in an environment of volatility and uncertainty. Only insurance companies are able to eliminate Longevity Risk. They can do this successfully because they also deal with Mortality Risk. They win when people with life insurance live a long time and they win when annuitants die too soon. Everything in the middle is just a calculated profit. No other investment or institution can do that.

Some clients have so much money they cannot possibly run out of money, even if it’s simply stuffed in a mattress. But most people need help to properly position their assets, take the Longevity Risk off the table and cover the extra cost needed when they require long-term care.

I’m not suggesting that investment portfolios should be replaced with insurance policies. But there is no doubt that retired clients will be better off when their portfolios include a guaranteed Pension Income floor that eliminates Longevity Risk. It’s an insurance strategy to increase income when needed to protect your portfolio from decimation due to excessive health care costs and even provide a more efficient and predictable solution for leaving a financial legacy.

Most planners like myself admit to modest knowledge of the insurance industry, its unique products and the many sophisticated strategies that can be employed to address these retirement-based concerns. But some of us continue to rely on the investment concepts we have used for years to grow assets. What is really needed are concepts for our retired clients so you can spend your money to maintain the best possible life style without running out of money before you die.

We want to help you take Longevity Risk off the table, increase the security and predictability of your retirement income, and reduce stress.

The idea behind this post comes from a colleague in southern California, Gene Pastula. Thanks Gene. Tony

Investors’ Next Disappointment Will Come From Risk Mismanagement

080519_USEconomy1My Comments: Reader of this blog know that I try to include meaningful comments about investments and investment outcomes. Over the years, I’ve done well for some clients and done poorly for others. And while the past is history, there are always lessons to be learned. I have a personal mandate to try and do better in the coming months and years.

Here are some really good insights that I think will help you. Mistakes are part of the game, whether you prefer to make your own mistakes or hire someone to make them for you. I’ve you’ve hired me, you know that we’re on a really solid track these days and the future looks really good.

John S. Tobey / 3/29/2014

Risk mismanagement is everywhere. Many investors (individual and professional), investment advisors and even Wall Street are guilty of overstating, underweighting or misunderstanding risk. As a result, portfolios are being designed to disappoint. Worse, we have finally reached the best of times for investing, only to have investors’ prospects mucked up by bad investment decisions.

Disclosure: Fully invested in stocks, stock funds and bond funds. No position in Oppenheimer Holdings, mentioned below.

So, what’s wrong? There are three basic mistakes being made:
1. Overstating risk and investing for the next catastrophe. Here, protection from risk is taking priority. The focus is on what could go wrong. The result? Invest for protection, avoiding or hedging (watering down) equity risk/return and holding “safe” investments.
2. Understating risk and investing for top return. This attitude is a return of the performance chaser, looking for more return and less risk. The mistake is buying into a trend that happens to be exhibiting those characteristics, thereby underestimating risk.
3. Misunderstanding risk and investing inappropriately. There are many types of risk at work. Understanding them and how they relate to the investor’s situation is imperative for investing appropriately. Too often, a risk measure is chosen that over- or under-emphasizes an investment’s risk (e.g., a high or low price/earnings ratio for a stock).

How to avoid the mistakes

First, realize risk is everywhere. OppenheimerFunds has a current ad, headlined “Taking risks is not the same as using risk.” It makes the key point about investing: All investments carry risk, so make sure to carry (use) risk for your benefit, not simply accept it as a cost of owning a desired investment. (Even cash carries risk – the loss of purchasing power through inflation – so an investor must choose which risks are acceptable and in what combination.)

Second, realize you can’t have it all. As a new stockbroker in the 1960s, I was given a sales kit that included the golden triangle. It depicts investing’s tradeoffs that exist in all markets – i.e., within the triangle below, we must pick our desired point. There is no ducking the fact that investing is the ultimate compromise – that we cannot have our cake and eat it, too. (Interestingly, Oppenheimer has brought this message back in its aptly-named website, GrowthIncomeProtection.com.)

Third, start with the basic allocation and work from there. The long-held, rule-of-thumb allocation is 60% stocks (equities) and 40% bonds (fixed-income). This mix provides the most oomph (return) per unit of risk. That doesn’t mean it should be every investor’s choice, but it is the perfect place to start. Varying from it has consequences that need to be understood and accepted.

Fourth, control that risk over time.
Controlling a portfolio’s risk means taking two actions:
1. Rebalance as needed. Different investments will follow different paths. The resulting performance differences reset the portfolio’s risk, so it’s important to periodically rebalance back to the desired allocation and risk level.
2. Monitor the chosen investments. Changes happen to funds and companies, so it’s important to ensure the reasons for choosing them remain in place. If not, they should be replaced.

Fifth, check performance infrequently and do not use it to change allocation. It’s a proven fact that more frequent checking makes risk look greater and trends look longer. Both erroneous perceptions can lead to equally erroneous portfolio allocation changes that adversely affect risk and return. If the portfolio has been designed appropriately, expect to keep the allocation unaltered. Only a change in personal circumstances might require an allocation change.

Sixth, avoid all combination investments unless you fully understand and need them. Wall Street is filled with combination investment “products.” While some have a financial purpose (e.g., convertible bonds and mortgage pass-through bonds), some are designed more for investors’ desires (e.g., leveraged funds and stock + written call funds). Options, by themselves, are also a combined investment. All of these investments have odd risk-return characteristics that need to be understood. Otherwise, investors can see win-win where none exists.

The bottom line
Happily, we are now in a normal market environment. That does not mean everything is headed up and there is no uncertainty – that would be an abnormal market. Rather, it means we can rely on time-tested investment wisdom to design our investment approach. Starting with the basic 60%/40% mix, we can fashion a portfolio that best fits our needs, ignoring today’s headlines and any left over Great Recession worries.

Another risk, not discussed above
The academics refer to it as “specific” risk. It’s the uncertainty attached to an individual investment (e.g., a favorite stock), a non-diversified portfolio (e.g., a biotechnology fund) and an investment strategy (e.g., a small-cap growth fund). Selecting successfully can increase return, but picking poorly can reduce return. Because so many experienced investors are actively involved, Warren Buffett offered his advice to buy a broad index fund and leave the stock picking to others.

What the Dept. of Labor Might Do With the Fiduciary Rule

My Comments: Last week I attempted a definition of the word FIDUCIARY. My goal was to somehow increase the chances that financial professionals who use the term “advisors” are in fact fiduciaries, and as such, bound by law, by tradition, by ethics, to act and behave in their clients best interests.

As a reminder, there are forces at work who we typically refer to as “Wall Street” who don’t want their salesmen and brokers to be held to a fiduciary standard, any more than your local car dealer salesmen and brokers are anything more than just salesmen and brokers. That’s not to say they are dishonest; they are not. But when there is a dispute, there is no accountability, as there is with a fiduciary.

This is another report on the saga those of us in the financial trenches face as we try to level the playing field.

By Paula Aven Gladych / March 26, 2014

The U.S. Department of Labor is scheduled to release its re-proposed fiduciary rules sometime this year or early next, so what should the industry expect in the latest rendition of the regulation?

The final rule, for starters, could include restrictions like preventing firms from paying their brokers or agents more for selling in-house products.

But according to Bradford Campbell at Drinker Biddle & Reath, the recrafted rule will most likely include exemptions for certain prohibited transactions.

The industry hopes DOL will exempt broker-dealers from having to change their business model, which reaches lower and middle-income investors who need advice but can’t afford a registered investment advisor.

If the DOL allows broker-dealers to continue doing what they’ve always done, despite their lack of fiduciary status, those in the industry who are opposed to the re-proposed rule may stop objecting to it.

Fiduciary status dictates how advisors set up their business. Fiduciary advisors usually are fee-based, whereas brokers tend to work on commission. Under the re-proposed fiduciary rules, brokers to IRAs would have to follow the same rules as registered investment advisors. Any advice they give to clients would be considered fiduciary advice.

The rules could cost millions in compliance and higher costs to investors, opponents say.

Another big issue is IRAs and rollover treatment, according to Campbell. If the DOL continues to apply the fiduciary standard to IRAs and restricts rollover solicitations, this could become the most controversial portion of the rule.

Opponents believe that restricting advice will damage the savings of low to middle-income people who can’t afford to pay for an RIA but can take advice from their broker-dealer. The problem with that scenario, according to the DOL, is that advice given by broker-dealers sometimes has monetary gain attached to it. The broker gets a commission if a client buys certain investments.

Under current law, investment advice is viewed as fiduciary investment advice only if it concerns valuation or buy/sell/hold recommendations and meets all five of these criteria, according to Drinker Biddle:
• Regularly provided (not just one-time advice);
• for a fee;
• individualized to plan;
• pursuant to a mutual understanding;
• that the advice will be a primary basis for plan decision-making.
A 2010 fiduciary rule proposal expanded the definition of fiduciary to include management recommendations, such as selecting an asset manager. Once implemented, it will require greater transparency and responsibility on the part of securities brokers who work with IRAs and 401(k) plans.

Other regulatory items that are on the 2014 agenda include the second round of fee disclosure rules, which propose that plan providers include a guide showing how plan sponsors can find all of the fees they are paying throughout plan documents.

Also expect the DOL to continue discussions about brokerage windows, lifetime income projections, annuity selection safe harbor and target date disclosure in upcoming months, Campbell said.