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Monday, December 1, 2008

They Myth That Government and Taxes Are Evil

In her book, "10 Excellent Reasons Not To Hate Taxes", editor Stephanie Greenwood outlines just that. For your convenience, I will summarize them for you.

1. Progressive Taxes Are A Good Deal
2. They are a moral obligation
3. They can strengthen the economy
4. Excellent public schools depend on taxes. And we all benefit from the education of others.
5. Taxes help families raise kids
6. Pollution taxes may save life on earth. And they will definitely reduce health care costs.
7. Taxes can promote economic justice for all. That is far different than "socialism".
8. Taxes pay for economic opportunity, supporting a system that rewards hard work and creativity rather than "winning the ovarian lottery" [inheritance] as Warren Buffet puts it.
9. Taxes are good for business, providing the necessary collective infrastructure, resources, and law inforcement necessary to invest and profit from running a business.
10. Taxes fuel democracy

Thursday, August 21, 2008

The Myth that Indexed Annuities are Evil

Any financial choice has only three potentials: it will either improve your financial situation, harm it, or have no effect at all. If a financial choice improves one's financial situation, then it would probably be a very popular choice. Equity indexed annuities are taking in billions.

The fact is, conservative savers are fleeing for safety because:
  • Talk of U.S./global recession is widespread
  • Banks continue experiencing massive losses
  • Inflation is the highest since early 1980’s
  • Rising unemployment becoming a big problem
  • The sub-prime/housing problems will not go away
  • Stock market is wildly volatile & nerve-wracking
Safety, principal guarantee & peace of mind are very much in demand. There's only one safe money place to get upside potential with zero downside risk — index-linked annuities.

Tuesday, August 19, 2008

Re-Engineering Retirement- the myth of being saved by "the market"

Re-Engineering Retirement:

Take the "oops" out of retirement uncertainty

The expression "oops" doesn't inspire confidence in procedural matters of either health or finance. If your surgeon says it just before you go under, you're probably going to have some concerns as soon as you wake up. An "oops" in a retirement strategy can be just as worrying. In the good old days of sustained bull markets, no real strategy appeared to be needed: The Market would make up for starting too late, saving too little, and investing in the wrong places.

To help reduce complexity and uncertainty in this potential "oops" situation, Allianz Life has developed the "Re-Engineering Retirement" program. It involves discussions around three levels of retirement expenses, seven sources of retirement income, and five retirement options.

Re-Engineering Retirement is a solutions-based process. Through it, you can come to understand many of the elements that contribute to a confident retirement. Hopefully, with my assistance, it will take the "oops" out of your retirement party.

The five retirement options allow me to show you that if your current assets will not meet your future retirement goals, there are still some pre-planning solutions for you to consider.

Option 1: Do nothing

Your first option is to do nothing and simply be satisfied with the way things are. When you finally assess the reality of a significant reduction in your standard of living, it may be too late to do anything about it. As a financial professional, I want to have a well-documented file. Our Re-Engineering Retirement workbook reminds me to make notes on what you decide- or don't decide -to do.

Option 2: Save more

The second option deals with putting more away now for future delivery. This is always easier said than done considering all the current economic pressures; but putting away even a little more now is helpful.

Option 3: Work longer

The third option involves you working more years before taking retirement. This is always a little emotional since many people work because they have to, not because they want to continue in a profession they really enjoy. This option could also mean working part time, considered to be supplemental, to allow for the maximum benefit from Social Security.

Option 4: Risk more

The fourth option is to take on more risk in the accumulation phase. We all know that this can lead to greater uncertainty. No one's risk tolerance goes up when anxiety sets in. It's just the opposite, and what you have already accumulated might be jeopardized by taking on additional risk and then possibly bailing out of the market at the worst possible time.

Option 5: Re-Engineer

The fifth option is a combination of all these elements.

If you want to learn how to "re-engineer" the five options discussed above and help mitigate the possible "oops" potential in your retirement process, call me about Re-engineering your retirement. 503-698-4812

All the Best,


Wednesday, July 16, 2008

Ten Steps to Being a Savvy Retiree

If you haven't figured it out already, I like lists. I don't like failure. Aviators- regardless of their experience -all use preflight checklists due to the extreme consequences of failure in their avocation. So to keep my clients from crashing and burning, I like to promote checklists. This one is from an old American Skandia publication: "Ten Steps to Being a Savvy Retireee" according to my editorial license. By the way, nothing here is a myth, contrary to the blog title.

ONE: Meet with your financial adviser(s). The original publication had this as step #10. But why waste time or take the risk of missing out on the latest developments? Advisers who have been around for a while have seen just about every possible type of client, from extremely successful to woefully unsuccessful. Wouldn't you like to know who to emulate and who to avoid?

TWO: Calculate the financial impact of working in retirement. You may suffer reduced Social Security benefits or higher taxes. You need to know your Social Security "breakeven corridor".

THREE: Understand the outcome of early retirement. 71% of retirees who retire earlier than they preferred (due to health or layoff) wished they had saved more. Plus, you may incur penalties and miss out on substantial compounding by retiring too early. Finally, you may unduly reduce your Social Security benefits. Permanently.

FOUR: Choose the right assets for income. This is a relatively old statistic but it's probably even worse today; American incomes decline by roughly 50% between ages 65 & 85. An often neglected factor is taking income from the wrong assets at the wrong time. If I were a financial journalist, I would give you a snappy rule of thumb. But it just depends on your unique circumstances.

FIVE: Compare your payout/income options. This was more relevant when pensions were common. They're not anymore. But generally, if you can, take the smallest distributions you possibly can from qualified accounts (IRAs, 401k's, etc.).

SIX: Build a diversified portfolio. Actually, the word "diversified" has assumed more meaning than it deserves. The idea of "safety" has been bundled into it, illegitimately. You can have a diversified stock portfolio and still lose your shirt. I would say, build an appropriate portfolio that does not subject you to greater odds and degrees of loss than your lifestyle can handle, and then only if the rewards are commensurate with the risk. Finally, why take any risk when you don't have to? The greatest risks result from doing nothing.

SEVEN: Develop a prudent strategy to meet your lifetime expenses. This all depends on your plans. Are you more concerned about security, leaving money to your kids, charitable donations? Be sure your strategy deals first with your financial survival. Be sure you will be able to pay the electric bill and buy your prescriptions before you get grandiose about the grandkids.

EIGHT: Take care of the legal stuff! Is your will old? Do you even have one? How about powers of attorney, advance directives, and trusts. If you would like to be a financial and administrative burden to those you leave behind, then ignore this step.

NINE: Be sure your beneficiary designations are appropriate. For example, many IRA custodians & annuity companies now allow you to just check a "Stretch" box in the beneficiary section if you want your IRA balance doled out over a number of years to your beneficiaries so they don't take a big tax hit in one year. Beneficiary designations are a simple, free, and automatic method to pass most of your money assets outside of probate. But don't fiddle with them without expert advice.

TEN: Plan your retirement lifestyle. I know few who do this. They just hope for the best and brace themselves for the worst. Or, they hunker down and deny themselves unnecessarily. What do you want to do, have, be? Those are the questions.

Thursday, July 3, 2008

Asset Protection now easier

Think You’re Leaving the “Family Farm” to the Kids? Think Again. The State of Oregon May Have Other Plans.

You’ve worked hard all your life, been retired for quite a while, but now the old bod’ is wearing out and you need help. Your fixed income isn’t enough to pay for in-home assistance so you scour the area for facilities and settle on a facility in Oregon City. However, you and your wife’s $4000/mo. income- which seemed handsome before –is no match for the $6000 monthly fee. Your liquid assets are quickly kaput. You go on Medicaid. Five years later you die. Your wife remains healthy until her death a year later. The kids inherit your $500,000 “farm”, right? Nope.

Ever hear of the ominously named Omnibus Budget Reconciliation Act and, specifically, the 1993 Estate Recovery Mandate for:
  • Nursing home or long term care
  • Home and community based services
  • Hospitalization and prescriptions (at state’s option)?

This provision requires States to go after Medicaid beneficiaries’ assets to recover the State's costs of proving your care.

Ironically, the act was modeled after Oregon, which has had estate recovery provisions since the 1940’s. But here’s why you find this so interesting: In the above example, assuming Medicaid pays 100% of your nursing home costs for the 5 years, that’s $360,000 ($6000 x 12 months x 5 years). Plus, you had to be hospitalized twice for those heart attacks, at $25,000 each (they were having a special) for a total of $410,000. Before any of your estate passes to anybody, Oregon is there with its pre-death TEFRA recovery lien to collect its $410,000. The three kids get $30,000 each; $30,000 each from your lifetime of labor and frugality.

Naturally it’s not that simple. You can retain some property and income, called “exempt assets” as shown below. Until your spouse dies you can keep:
  • Up to $1911/mo. gross income
  • $104,400 in “Community Spouse Resource Allowance” (“community” means the spouse is not institutionalized)
  • a home
  • a car
  • household goods
  • business property & business real estate
  • prepaid burial provisions up to $1500

The State can take the following nonexempt assets:
  • Cash over $2000
  • Stocks, bonds, IRA’s, Keogh’s. CD’s, T-bills, T-notes, Savings bonds (you get the picture)
  • Whole life insurance
  • Vacation homes
  • Second vehicles (kiss the Harley goodbye, Grandma).

“Well”, you might say, “I’ll just give all my stuff to my kids before the State comes knocking on my door.” Trouble is, with a few exceptions, if you do that within 60 months of your application to Medicaid then you will be subject to penalties. Say for example you give your $200,000 in CDs to the kids just before you go on Medicaid. Based on a $5360/mo. formula, Medicaid would then deny benefits for 200,000/5360 = 37.31 months, requiring you to spend $200,000 of your own money anyway, assuming you even have it. If you do not, they will recover it from your spouse’s estate.

What can you do about this? Here are some advanced planning ideas, the first of which just received an additional boost for Oregonians this year, and I’ll discuss that one first because it’s the easiest no-brainer solution.

Let me confess. This is an area of significant frustration for me, not just from the behavior of other people but my own as well. If you know in advance that there is a 100% chance a specific event will take place in the future then of course you would prepare for that event now, right? Rarely. For example, I’m never ready to do my taxes until mid-April the following year. Never. And we all know about the following certainties. Someday,
  • We will stop working
  • We will be unable to care for ourselves
  • We will die

Sure, for some unlucky folks (or lucky, depending on your point of view) all three may happen simultaneously. But for most of us these stages will happen in this order: we will stop working, we will need assistance, we will die. And for the really unlucky (and their unlucky families), the middle period will be the longest.

The odds of a male needing long term care in his lifetime are one in three. For the women, the odds are one in two. Yet why is it that only about 8% of eligible Americans take responsibility and do something about this? And why do even fewer take other advanced steps to deal with it? It’s not fun to think about these things while watching American Idol (Actually, I much prefer thinking about disability and death versus watching American Idol.)

Here is why you should buy long term care insurance as soon as possible:
  1. I really need the business. No, even though that’s true, you should never buy a financial product to meet the needs of the salesperson no matter how much he begs. Seriously, here are the real reasons:
  2. The Government will not take care of you. The Government is sending ever stronger signals that you’d better be self-sufficient, signals in the form of tax deductions, credits, estate protection, etc. It’s not going to get any better in the near future. You buy long term care insurance with your health in addition to your premiums. Once you need it, it’s too late to buy it. You are reaching out with the long arm of foresight to keep a door open for yourself in the future, the door to choice and security.
  3. You can’t ever save enough. If, instead of buying insurance, you and your spouse just invested your premiums, and, could earn a consistent 6% rate over the next 20 years then you would have enough money to pay for about one year of care. For one of you. The average length of care is 3-5 years. Even the wealthy buy Long Term Care insurance because they understand the concept of risk transference, i.e. having an insurance company assume most of the risk of loss of their home, their cars, their assets & income. Just because you could afford to rebuild your burned up home doesn’t mean you should. The same is true for long term care.
  4. There is no advantage, at all, to waiting. No matter when you eventually buy Long Term Care Insurance, you will spend more in total premiums than if you buy it now. That’s because every eight years that you procrastinate, the premiums double. Lock them in now (caveat: not all policies have premium guarantees).
  5. The tax man will help you pay for it. Federal deductions and Oregon tax credits can reduce your total net premium cost by 50% or more. If offered as an employee or executive benefit, premiums are fully deductible to your corporation and benefits and premiums remain tax-free to the employee/executive.
  6. Long term care is already costing your company big bucks, $2772 per care giving employee per year.
  7. The State of Oregon, on January 1st, became a Long-Term Care Partnership state. Remember those State Medicaid liens? To the extent you collect benefits from your own Long Term Care insurance policy, those liens are eliminated, your assets shielded. For example, if your policy paid you $300,000 while you were in a nursing home, Medicaid would exempt that amount from its estate recovery.

#2: Have an attorney draft an Income Cap Trust for you. See for a sample. This is an irrevocable living trust agreement that can help you qualify for Medicaid by diverting income into a trust, subject to certain limitations.

#3: Begin the legal transfer of assets to your heirs as soon as possible to take advantage of your $12,000 ($24,000 four couples this year) annual gift tax exemption. The limitation is not per donor, it is per donee. In other words, one person can give $12,000 to as many people as she likes. Such asset transfers are easy to screw up so don’t even try without consulting with an elder law and/or estate attorney.

#5: Consider charitable annuities and trusts, especially for highly appreciated assets such as real estate and stocks which you’ve owned for a long time. These arrangements can provide surprising benefits including guaranteed lifetime income, generous current and ongoing tax deductions, as well as the ability to do well while you’re doing good. In many cases you can be much better off by gifting rather than through an outright sale of an asset. A knowledgeable adviser can help you sort through the many options available here locally.

So, going back to our original example, wouldn’t you prefer that your three kids get $167,000 each- instead of a paltry $30,000 -out of your $500,000 estate? Then get smart, get help, and get going!

[DISCLAIMER: this is an unofficial opinion piece based on the author’s best knowledge of the subject. It is not intended to be legal interpretation of State or Federal law or tax regulatioins, nor is it intended or implied to be legal or tax advice. Consult with your elder law attorney and CPA to see how your specific circumstances might be affected]

Friday, April 25, 2008

Annuity Myths

Annuities have gotten a lot of bad press lately, mainly because there are some terrible annuities out there- which I will list later -as well as some terrible "advisers" selling them. The "Top Ten" myths are ubiquitous, appearing on numerous websites such as
These myths appear to be propagated principally by journalists, none of whom have or are required to have any industry training, licensure, or regulatory oversight. Although I wholeheartedly welcome well-intentioned investigative journalism, all I've seen so far with respect to annuities is sensationalism. Just because someone somewhere got burned by a crook peddling a lousy annuity does not mean annuities are not excellent options for many investors. If it did mean that, then we should also never buy a used car.
The best defense is an educated consumer. So please take time to review the myths debunked below as well as the ending comments.

Myth #1: Every Annuity is a Variable Annuity
Very often, the risk properties and high expenses of the variable annuity are incorrectly attributed to all types of annuities, undermining consumer knowledge and confidence in non-securities based annuities such as fixed, immediate and indexed investments. Nearly half of all annuities purchased have nothing to do with stock market performance, and, offer guarantees through fixed minimum interest rates, guaranteed lifetime income, and future protection against loss of principal and earnings. They should not be lumped together with Variable Annuities. Plus, you can actually have the best of both worlds with index annuities which allow you to participate in market gains but not losses with lower expenses than most mutual funds.
Myth #2: Your Insurance Agent Isn’t Qualified to Offer Financial Planning
Some investment managers will diminish the value of annuities on the grounds that insurance representatives do not need securities licenses to provide investment advice. However, a securities license is only required when selling speculative investments where the potential for loss exists. Many insurance providers focus on fixed and indexed annuities for retirement where loss to principal and earnings is not an option for our clients. We undergo continual training and professional courses year round to improve our knowledge and capabilities for senior planning. In addition, we are deluged with product offerings from many companies and are therefore kept aware of the full range of annuities available on the market. But as a matter of fact, I am securities licensed so that I can discuss and give advice on most financial vehicles. I also own my own Registered Investment Adviser Firm in Oregon, Duell Wealth Preservation.
Myth #3: Fixed Annuities Will Never Outperform Inflation
The fixed annuity offers security in knowing you are guaranteed a set interest rate over a specific period of time, and is often used to give long term investments more tax-advantaged growth far superior to CDs. Some investment advisers are against fixed annuities because of their perception of future inflation. They feel that some risk must be taken to grow savings to maximize personal wealth. But for investors who cannot afford to lose any more of their life savings, risk should never be a substitute for long term planning and the many available income guarantees.
Myth #4: All Commission Based Insurance Planners Are Biased
It wasn’t all that long ago that fee-based planning was created by large financial firms to ease client fears of non-objectivity. Their goal was to maximize medium term earnings and residual income while having more direct control over client investments. Ironically, many within that field do not even actively sell fixed or immediate annuities for safe retirement income purposes. They focus only on securities with minimum account requirements before they even offer investment management services and support. In further contradiction, earning reports for 2001 showed that only the top ten percent of insurance planners earned as much as the average stockbroker did. Crooks will be crooks no matter how you pay them. Would you rather pay 1.5% of your money for the next 20 years in "wrap" fees to your broker, or, pay a one-time commission of 0% to 5%?
Myth #5: Annuities Are All About Penalties and Surrender Charges
Like the 401k and IRA, the annuity takes advantage of special legislation passed by Congress that provides tax incentives for us to save more money for our retirement. The long term savings approach allows annuity providers to offer higher interest rates, guarantees, tax deferred accumulation, and advantageous planning benefits for tax and distribution planning. No one would typically write negative articles about how an IRA or 401k incurs unnecessary penalties for accessing money prior to age 59 ½, so why would they criticize annuities for similar parameters? IRS makes the rules, not the annuity companies. Plus, annuities exist for which there are no surrender charges, if you are willing to give up some other features.
Myth #6: Never Invest Your IRA Money in an Annuity
A frequent caveat found within tips on how to qualify your financial adviser is to automatically disregard anyone who ever recommends an annuity within an IRA. The should-be obvious exception to this is when safety is paramount, loss to principal is not an option, and a fixed annuity offers a higher rate of return than other forms of traditional conservative savings. More often than not, fixed and indexed annuities way outperform other non-security investments when protection of principal and earnings is paramount. The annuity would have been selected for its interest paying capabilities as a growth investment and it's pension-like income features, not as a tax deferred tool within a tax deferred account. The tax deferral is free, granted by IRS.
Myth #7: Only Deal with Big Names You Are Familiar With
While people typically gravitate towards big companies with names that are instantly familiar, brand visibility doesn’t automatically equate to the best rates, service, performance or safety. Need I bring up AIG, Enron, Citi, etc.? Many planners can be placed into two categories when it comes to helping select annuities for a retirement plan: those who only sell products that their parent company creates, and those who remain independent to ensure they have access to the widest possible range of products on behalf of their clients. Restrictive affiliations and objective advice do not normally go hand-in-hand as they can limit the guidance you receive for key financial decisions. Make sure the adviser you select is not restricted in the advice and recommendations she can make to you.
Myth #8: Only Deal With Registered Investment Advisors
Much of the criticism towards annuities comes from professional asset managers who earn their commission as a percentage of the total money they manage- and keep at risk, by the way -for "maximum growth" (or, these days, maximum shrinkage). Many of them forget that not every investor is after great wealth in the stock market, and too often seniors are talked into placing their money into vehicles that could instantly reduce their life savings. There is a significant difference between the professional investor who wants to aggressively grow her multi-million dollar portfolio, and the retiree with $150,000 that will likely need every single dollar- and more -to get through their retirement without outliving their savings. Having said that, I do happen to be an RIA.  You should only deal with legal fidcuiaries.
Myth #9: Indexed Annuities are Often Sold Inappropriately
Well, this is actually not a myth. It's true. Every product on the face of the earth has been sold inappropriately. But the opinion of some stockbrokers is that equity indexed annuities are never suitable for retirement planning. A top complaint is that they limit the total earnings an investor can receive during upswings in market performance. The EIA, though, was purposely created as a hybrid investment product that combined the growth potential of the stock market with the safety features of a fixed annuity. While upsides may be capped at 7% to 12%, an investor never has to worry about losing principal or earnings, and typically has several options by which to guarantee minimum interest rates paid regardless of market performance. As far as suitability goes, according to consumer data from the National Association of Insurance Commissioners, in 2004 equity indexed annuities reached sales of $23.3 billion [$50+ bil. by 2008], with only 38 closed complaints nationally, or $614 million of sales for each complaint received.
Myth #10: Our Financial Designation is Better Than Yours
Many planners and consumers rightfully look to financial designations as an indicator of professional service, dedication, and commitment to excellence on behalf of clients. Some investment groups go so far, though, as stating that only two designators should be utilized for financial planning, ChFC & CFP, and that the rest should be instantly dismissed. I tend to agree. But, ironically, many of the members within these two bodies do not even carry insurance licenses [I do], as they focus on risk based investments (oxymoronically referred to as "securities") for aggressive growth purposes. They offer little support to risk-adverse seniors looking for maximum security and safety for their life savings. Regardless of her financial designations, always make sure that your financial adviser understands your risk tolerance and provides service and products suited to your individual investment requirements. Ask for guarantees. They do exist.
About Annuities
Annuities provide real advantages, ranging from competitive interest rates, to guaranteed income for life, to the often cited tax deferral advantages of compounding principal and interest over long periods of time in preparation for retirement distributions. They also offer many unique and beneficial ways to protect estates, avoid probate, and pass money to future heirs.
Many individuals looking for safety within their investments are being exposed to significant and unnecessary risk to their savings and are not even aware of it. To maximize the safety of retirement plan, ensure you deal with a knowledgeable adviser who can provide independent and objective advice, buy only from reputable companies with a strong performance history in annuities, and never agree to anything that concerns your retirement and financial security that you don't fully understand. That's worth repeating: never agree to anything you don't fully understand.