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Monday, December 29, 2014

I Understand Mass Media

The truth is, I surely don't understand mass media.
For example, in all the years since I've been publishing this blog, the only post that generated hate mail- and also the highest number of page views -was my post "Myth- Studded Snow Tires Are the Safest".  Based on personal experience as well as lots of research, my opinion hasn't changed.  The preponderance of the evidence tells me the safest Winter tire for Oregon weather is the studless tire, such as Blizzak or Ice-x.   I drove up to Timberline lodge on fresh unsanded black ice with a Subaru & Blizzaks.  It was like driving on dry pavement.  I was actually disappointed at the lack of Winter driving skill required.  I have no idea why this post would generate the most interest and vitriol.

The next most frequently read posts involved Wall Street "guru" Ken Fisher, most notably "Ken Fisher Part II, Debunking 'Debunkery'"  a critique of his massive tome by that name.  I suspect most of the readers work for- or are considering working for -Fisher Investments.  The upshot is that the book is a dangerous blend of truth and falsehood (and I'm not saying the former is accidental nor that the latter is intentional).

Fisher's most glaring error is his claim that the subaccounts in Variable Annuities are only as sound as the financial strength of the annuity company.  Not true.  That's why those accounts are called "subaccounts" or "separate accounts".  This is not the only case of conflation of expensive, risky variable annuities with other safer varieties.

Wednesday, December 17, 2014

"Ten Things Life Insurance Agents Won't Say"- Thing #10: "Our Long Term Care Coverage Isn't So Great (for you or us)"


I guess Mr. Goldstein ran out of fabrications for life insurance agents & is shifting to long term care insurance (LTCi) agents.  And "shifting" is the key word:  remember thing #1, Americans are buying too much life insurance?  Now we shift to the exact opposite criticism, the supposed rotten thing about LTCi is that Americans aren't buying enough of it.  Why would that be?

I suspect it is not being properly structured by the agent.  In the old days I always recommended lifetime coverage because of the utterly financially devastating possibility of being on claim for 20 years.  Now, lifetime coverage is literally unaffordable in most budgets.  Plus, the average nursing home stay has fallen dramatically from 3.5 years to 13 months.  (Key caveat:  "Average" applies to no one.)  Here are the most important pieces to build an adequate, affordable LTCi plan:
  • Compliance with your State's Partnership Program, the two main features of which are:
    • Inflation protection is required (depending on age group)
    • Enhanced asset protection- in a nutshell, to the extent you collect benefits from private LTCi, your asset thresholds to qualify for Medicaid, and for exemption from Medicaid recovery after you die, are increased.
  • Partner or Spousal discounts.  Companies recognize that insureds who don't live alone will need less care.
  • No more than a 5 year benefit period.  This will cover the Medicaid look-back period for transfer of assets.
  • At least a 90-day Elimination period, the length of time you must wait- after going on claim -for benefits to begin.  If you can't afford to fund your first 90 days of expenses then you probably can't afford LTCi.
  • A Cash benefit.  Most LTCi policies are indemnity plans;  they reimburse you for expenses incurred.  Cash benefits, on the other hand, are triggered by your poor health, whether you've incurred expenses or not.  This is a welcome benefit to help you through the 90-day elimination and to pay for excluded expenses.
  • Finally, if you can afford it, a "limited pay" policy, which is paid up in 10 years or less.  An endangered species, limited pay LTCi is really expensive.  But it's bulletproof protection from future rate increases.  Because of the cost, hardly anyone does this outside of an executive benefits package.
If LTCi still has no room in your budget, there are great asset-based alternatives that don't impact your budget at all. 

Tuesday, December 9, 2014

"Ten Things Life Insurance Agents Won't Say"- Thing #9, "If you die we'll pay your boss".

#9:  "If you die we'll pay your boss" is next in my series of responses to "10 Things Life Insurance Agents Won't Say" by Daniel Goldstein "Personal Finance Reporter" for MarketWatch.

I know it's probably difficult to come up with ten facts that life insurance agents try to hide from their clients because most of us go to great lengths to disclose everything.  So this one is totally ridiculous:  If you are paying for a life insurance policy on yourself it is virtually impossible that the beneficiary designations would be a surprise to you.

The so-called "dead peasant policy" practices of large companies- being both distasteful and morally decrepit -nevertheless are evidence of life insurance's tremendous leverage.  Insuring key employees still makes sense as long as it is protection against the loss of their irreplaceable financial value to a company.  It should not be used simply as a way to boost the bottom line.  Most insurers no longer issue such policies.  Good.

In addition to Key Person insurance, there may be contractual reasons for a company to insure an employee or partner (depending on legal structure).  For example, if upon her death a partnership agreement gives a partner's family ownership and control of her shares, the remaining partners may prefer to buy out the heirs without having to borrow money or come up with a bundle of cash all at once.  A life insurance policy can provide those funds.

The takeaway:  "If you die we'll pay your boss" is less likely than being struck by lightening.  

Tuesday, November 18, 2014

"Ten Things Life Insurance Agents Won't Say": Thing #8

8.  "Someone could fake your death and collect on your benefits" is next in my series of responses to "10 Things Life Insurance Agents Won't Say" by Daniel Goldstein "Personal Finance Reporter" for MarketWatch.

Goldstein quotes Henry Bagdasarian (Pres. Identity Management Institute) that life insurance fraud costs the industry about $70 bil. per year.  It's closer to $100 bil. these days.  But that includes people directly ripping off insurance companies with fake claims and money laundering schemes.  I could find no reliable statistics on the dollar amount of stolen death benefits.  I suspect it is a very small portion of the total.

Assuming someone could fake your death and collect your benefits right out from under your nose, how can you prevent that from happening?  On his website Bagdasarian has built an exhausting list of cautions and steps.  Goldstein has a few.  But they both miss the most important gate keeper between your life insurance policies and fraudsters:  your agent.

An experienced, local independent agent is your best advocate.  Have doubts about a phone call or correspondence?  Call your agent.  Do you really believe that you or some columnist is going to be more versed in the industry than your agent, who has dealt with thousands of real people in real situations?  You agent will periodically review your situation, usually with you present.  If the company gets a death claim (or any change request for that matter) your agent will be notified.  And he or she will check with you, don't you think?

So, I guess Goldstein is correct with Thing #8.  Even though it's remotely possible, I've never said, "Someone could fake your death and collect on your benefits".

Tuesday, November 11, 2014

"Ten Things Life Insurance Agents Won't Say": Thing #7

THING #7:  "Our regulators can be toothless" is next in my series of responses to "10 Things Life Insurance Agents Won't Say" by Daniel Goldstein "Personal Finance Reporter" for MarketWatch.
In a continuation of his evidence-free article, Mr. Goldstein opines, "Unlike banks and big investment firms, which are largely regulated at the federal level, insurance companies are largely regulated by states . . .State insurance commissioners . . .don't have as much power to affect the practices of nationwide companies."
My first reaction is not printable.  We've seen exactly how well federal regulation has worked, allowing the very bankers who tanked our economy to walk away with record bonuses while stiffing their investors for the fines that were levied against them.  This is why many insurance companies want a "unified" regulatory system.  So it's easier to corrupt in their favor.
Reality is the converse of Mr. Goldstein's assertion.  State regulators can put an insurance company or agent out of business, in effect a corporate death penalty.  Oregon, though, is quite a bit more progressive than that by not allowing inferior companies and products to do business here in the first place.
Yes, regulation by the states creates a "patchwork" of inconsistent regulations and enforcement.  But the states that do it right become great places to live, work and do business in because of the economic stability and level playing field good regulation creates.

Saturday, November 1, 2014

IRS Doesn't Like You

Hey, c'mon.  Even IRS has a heart.  Look at all the inflation adjusted goodies they're giving us.  This is directly cut and pasted so any errors are not mine.
- Gary

In 2015, Various Tax Benefits Increase Due to Inflation Adjustments

IR-2014-104, Oct. 30, 2014
WASHINGTON — For tax year 2015, the Internal Revenue Service announced today annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these annual adjustments.
The tax items for tax year 2015 of greatest interest to most taxpayers include the following dollar amounts -
  • The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.
  • The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
  • The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)
  • The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).
  • The 2015 maximum Earned Income Credit amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
  • Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.
  • For 2015, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.
  • For 2015, the foreign earned income exclusion breaks the six-figure mark, rising to $100,800, up from $99,200 for 2014.
  • The annual exclusion for gifts remains at $14,000 for 2015.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA)  rises to $2,550, up $50 dollars from the amount for 2014.
  • Under the small business health care tax credit, the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,800 for tax year 2015, up from $25,400 for 2014.
Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2014-61, which will be published in Internal Revenue Bulletin 2014-47 on Nov. 17, 2013. The pension limitations for 2015 were announced on Oct. 23, 2014.

Friday, October 31, 2014

Social Security Won't Be There For Us

I sound like a broken record to myself but just to be sure, this blog title is a MYTH.

As long as we can keep the crazy people from privatizing it, Social Security- by any measure -will be solvent for decades.  And with minor tweaking that solvency could approach permanence (as much as anything is "permanent").  There is absolutely no need to decrease benefits nor increase retirement ages.

It is upon that evidence-based foundation that Social Security Optimization is essential.  In my retirement classes I drive home the need for long-term, holistic retirement planning.  Most clients I meet with have not realized Social Security is their single most valuable retirement asset.  Based on the clients I've met with so far this year, their average lifetime benefit is:
  • $950,458.   
Fortunately, with individually crafted benefit timing, I increased the average benefit to
  • $1,149,341 a 17% increase, or, 
  • $198,883 average per client/couple.

That's definitely worth a few hundred dollars in planning fees and a couple of meetings, isn't it?  But sadly, without a formal planning process 45% of men and 50% of women select the strategy that pays the lower amount!  They're leaving $198,000 on the table.

Here are the gross numbers for all new clients this year as shown in the graph:
  1. Total pre-planning benefits:  $28,513,741
  2. Total post-planning benefits: $34,480,241
  3. Total Increased Lifetime Income:  $5,966,500
I can't express how good that feels to me.  Not bad for a year's work.  And I only charge 10% of the gain as a fee.  Just kidding.  I wish I could.  Here is the more important question:  What if you could derive similar or better enhancements for the rest of your retirement assets?  

The above statistics are a basic summary and do not reflect the complexity of coordinating Social Security with other income streams and assets such as pensions, personal and company retirement funds, and estate planning wishes.  Holistic planning must include health factors, spousal benefits,  longevity estimates, unique budget requirements, future lump sum expenses & income, taxes and fees.  A plan must at the very least answer all of the following questions:

  1. What's the most I can lose in one year?
  2. What's the most I can spend?
  3. What's the most I can leave to my heirs?

Monday, October 13, 2014

Ten Things Life Insurance Agents Won't Say: Thing #6

THING #6:  " . . . and you’ll have to wait years to build cash value" is next in my series of responses to "10 Things Life Insurance Agents Won't Say" by Daniel Goldstein "Personal Finance Reporter" for MarketWatch.
If this is indeed true of the policy the agent is recommending it is almost impossible for him not to "say" this.  Unless you're in the habit of buying financial products without full disclosure.  Signs of non-compliant illustrations are:

  • You see the words "For Agent Use Only", "Not For Use With Consumers" or any similar text printed anywhere
  • If the pages aren't numbered this way:  "1 of 15, 2 of 15" and so on.
  • If any of those pages are missing
  • A summary is printed on agent letterhead rather than being identified as the insurance company's illustration, with company logo & office location
So let's be positive and assume you have your compliant illustration.  It will show you more than you'd ever like to know.  The worst case scenario will be referred to as "Guaranteed".  Be sure you understand, however, the two primary moving parts in the "Guaranteed" calculation, minimum interest earnings plus maximum mortality costs:
  1. Interest Rates- The Guaranteed table will assume the minimum interest rate for the entire duration of the policy.
  2. Mortality charges- "Guaranteed" ledgers also assume maximum guaranteed insurance costs.  The company can't simply raise these on a whim, they have to reflect actual mortality costs.  Unless Ebola takes over, I think we'll continue living longer and longer and these costs (and charges) will continue their downward trend.
If the Guaranteed part of the illustration is unacceptable to you, then you probably shouldn't buy the policy.  If all you want is a short term death benefit, term policies may be a better fit.  But if tax advantaged cash accumulation, income & estate planning are your goal, a maximum funded whole or universal life policy will rapidly accumulate cash. There are good reasons many attorneys and CPAs concur.
Next time we'll mull over Thing #7- Our Regulators Can Be Toothless.

Saturday, October 11, 2014

10 Things Life Insurance Agents Won't Say: Thing #5

Thing #5- "This whole-life policy won't pay for itself"  is next in my series of responses to "10 Things Life Insurance Agents Won't Say" by Daniel Goldstein "Personal Finance Reporter" for MarketWatch.

Historically, this was a legitimate problem.  You'll notice Mr Goldstein's lawsuit examples are over ten years old.  There was a time when the industry routinely illustrated long term interest rates of 12%, which of course imploded.    Computing power and competition have dramatically changed the industry.  The key, though, is the assumptions the agent uses in your illustration.

First, there are still powerful disincentives for agents to properly quote and structure policies (unless they are legal fiduciaries, which is rare).  The highest commission rates are paid on premium expense.  I've seen as high as 110% of first year premiums.  The excess cash contributions pay as little as zero %.  If cash accumulation and/or paid up coverage are your main goals then it is irresponsible to quote anything other than maximum premiums (that is as much cash as possible with as little premium as possible), regardless of how that affects the commission.

Secondly, the best policies now have no-lapse guarantees, a response to those imploding years when we had to go back to our clients asking for more premium dollars to keep their policies in force, at a time when those premiums were expected to "vanish".  It is indeed now possible for us to say, "this policy will pay for itself".

Finally, virtually all states require illustrations to show worst case scenarios.  If the worst case doesn't work, then you are assuming some risk that things won't turn out as expected.

So how do you protect yourself?  Insist on comparison among at least three of the top insurers in your state before choosing a policy.  Then ask, "What's the worst that could happen with this policy?"

Thursday, October 9, 2014

10 Things Life Insurance Agents Won't Say: Thing #4

Unfortunately, "Personal Finance Reporter" Daniel Goldstein published 10 financial myths in a row, all at once.  This post moves on to Thing #4 that life insurance agents won't say:  "This variable annuity is like a really expensive mutual fund."  Well, they won't say that because they can't.

Variable annuities are securities.   Securities registration and licensing are required before an agent can even discuss them.  Most don't find it worth the trouble.
To his credit, Goldstein actually understates the downsides of variable annuities, to wit:
  •   ". . . withdrawals from an annuity during the first 10 years of the contract can be assessed fees of as high as 8% . . ."  Actually, surrender charges of 10% aren't uncommon.
  •    "their annual expense ratios can reach as high as 3%".  I've seen annual fees, including riders & subaccount fees, as high as 4.5%.
 Then he drags out the tired old "high commissions" and "too complex" criticisms.  A full understanding of any financial product- even CDs -is very complex.  But the upshot of variable annuities is that contributions are virtually unlimited (unless a "qualified" account), earnings are tax-deferred until taken, and you can participate in most of the underlying subaccount gains while enjoying principal and income guarantees (if you add the appropriate riders).  Which question matters most?:  Is it complex?  or, "Will it best accomplish my goals?"

Sadly, it is when the market is booming that people flock to variable annuities, dazzled by short term performance and oblivious to the fees.  I do agree with Goldstein that there are less risky, more economical options.    

Monday, September 29, 2014

Why I Hate Annuities . . . and Ken Fisher Too!

To forestall the libel lawsuits I remind you that the titles of these posts are Myths.  In general, I don't practice "hate".  And, as you probably already know, I don't "hate" most annuities (and Ken Fisher really doesn't either, by the way).  There are excellent ones, and bad ones as well.
I certainly don't hate multi-billionaire Ken Fisher.  I've never met him.  I admire his research on, and support of, California redwood forests.  But really?  Are you going to sign over all your retirement funds to a high pressure firm that performs worse than unmanaged money?  Here are my issues with his firm's borderline practices. 

First and foremost are the ubiquitous (not to mention, factually remiss and ethically questionable) full-page "I Hate Annuities  . . . And So Should You" advertisements.  I have a copy of the "free" report offered in the ad and it is, overall, a fairly evenhanded summary of annuities . . . with a few serious errors.  But serious, glaring errors they are, and I wonder if they are accidental, for example conflating fixed annuities with their risky cousins, variable annuities.  I'm not going to get into those details in this post.  Later.

Second, is his gargantuan push to lure investors into a very bubbly market with claims of consistent 11+% annual returns.  Didn't work out so well back in 2008 either.  I think this is unconscionable, this appeal to the irrational fear and greed of investors who cannot afford to lose any money, especially in this overvalued market.

Third, is the neglect of his fiduciary obligations to his clients.  Fisher Investments has its own propriety products which it almost exclusively recommends.  They have a history of inadequate evaluation of client needs.  And for this they charge fees of 1% or more.  They have been sued and fined.

Fourth, as a result, Fisher Investments appears to be glossing over a major retirement risk for small investors:  sequence of returns risk.  The table below shows how average returns work.  It doesn't matter in what order the years are calculated, the end result is the same, as long as no contributions or withdrawals are made.

But suppose you're retired and making withdrawals to meet your fixed budget.  All of a sudden, losing years make a huge difference.  Nobody seems to be able to consistently predict sequence of returns.  So avoiding losses is essential in retirement.  Here are the facts in the table:
  • Initial principal balance is $500,000.
  • $25k annual withdrawals are taken, increased with inflation.
  • The average return for both portfolios is identical:  6%

Finally, Fisher is already a billionaire.  I encourage you to do business- instead -with local independent, fiduciary advisers who sell no proprietary investments & employ a holistic approach in evaluating and planning for your retirement.  And who don't resort to inflammatory mass marketing to add to an already gigantic empire.  If you're going to spend 1.25+% of your assets every year for planning and management you might as well at least get some guarantees in return.  Or at least outperform unmanaged index funds.

Sunday, September 21, 2014

10 Things Life Insurance Agents Won't Tell You: Thing #3

Thing #3. Your child doesn’t really need life insurance- Daniel Goldstein

Those of you who know me won't be surprised that I agree with this "Thing".  Other than as required by legal arrangements, nobody "needs" life insurance any more than they "need" a sports car.  Life insurance is a luxury, a luxury many of us prefer to have.  So for a child, especially, there is no "need" for life insurance.
So why do my peers and I often recommend coverage for kids?  To name just a few reasons:
  • It is, in fact, a great investment.  The best equity indexed universal life (EIUL) policies now have uncapped indexing options.  Of course you give up some gains in the form of a spread or participation rate but over the long term that is well worth the advantage of missing out on all losing years.  Combined with no caps on contributions & tax-free access, I know of no other way to replicate these benefits.  What a great head start for a kid.
  • Long Term Planning-  Someday your kid will be an adult with a family.  If you have lousy genes or poor family health history, let your kid arrive at adulthood with a fully funded, increasing life insurance policy.  Life insurance seems invaluable when you are no longer able to qualify for it.
  • Estate planning-  If you think you'll have a taxable estate, why not gift premiums to an EIUL?  They will reduce your taxable estate, and, pass tax-free to your beneficiary/owners.
As far as "profiting" from your child's death, I also find that idea repugnant.  But a small policy we had on my daughter allowed us to contribute to a medical foundation in her name after she died.  That really helped us through.

10 Things Life Insurance Agents Won't Tell you- Thing #2

Thing #2- "We'd rather sell you investments than insurance."
Hooboy.  This one makes me tired.  To reiterate, this "10 Things" series resulted from a breathtaking article by Daniel Goldstein.  Thing #1 appeared in a previous post.
Thing #2 makes no sense at all, especially the "wave of complaints" about missing out on market returns.  I see.  Those complaints must have flooded in after the 2008 crash, no?, where people like me continued to earn 4%, tax-free, while my peers were suffering double digit losses three years in a row.  Slow and steady wins the race.
I sort of agree with Mr. Goldstein's take on "suitability".  A good solution is to take financial advice, and buy financial products, from only  legal fiduciaries.  Here's the difference.  "Suitability" essentially means the product is OK for you, not inappropriate, not bad.  Under a fiduciary standard, however, it must be the best option the adviser can find for you.
In the final analysis, I sincerely believe most of us advisers want to "sell" you success in reaching your goals using the lowest cost, least risky options we can possibly find.  I'm not really sure what people like Mr Goldstein want.

Thursday, September 18, 2014


A chemist, a physicist & a statistician went hunting.  They came across a deer.  The chemist aimed and fired way to the left, missing the deer.  The physicist aimed and fired way to the right, also missing.  The statistician shouted, "We got him!"  (Thanks to my old friend David Salminen for reminding me of this classic joke.)  It perfectly illustrates the hazards of relying on tips from financial entertainers, a lot of whom appear in AARP Bulletin.

But I have to say the "5 Steps to Retire Happy" article was actually pretty good (until Step #5, which I"ll discuss below.)  To their credit, Bulletin editors drew from a stable of authors instead of relying on one writer's stream-of-consciousness.  Here are their 5 Steps:
  1. Ask these key questions:  Am I ready to retire?  What will I do when I retire?  How will retirement change my life?  What role will my children play?  How do I cope with the downside of retirement?  Can I afford to retire? 
    I wholeheartedly agree with Stan Hinden, the author, that often these "soft" questions are the most important.  Life is more than a math problem.  If we do great math but you're still unhappy, what good have we done? 
    Let me just say this though:  There is no substitute for Q&A sessions with an experienced, holistic, fiduciary adviser who is registered in your state of residence.
  2. Educate yourself.  Allan Roth lists some excellent books to read.  But it is also essential to take classes in your state of residence because tax regulations, product availability and estate planning statutes can be very different.  A generic, national market publication could send you down the wrong path.  (This is an unabashed plug for my highly rated Retirement Success classes!)
  3. Save all you can.  This actually goes hand in hand with #4.  Excellent article by Carla Fried.
  4. Avoid a nasty tax surprise.  If you can reasonably predict that your tax bracket will be lower in retirement, then by all means save in "Traditional" retirement accounts.  A lot of us however, due in part to our good savings habits and also doing work we love until we die, will continue to pay more in taxes.  In that case, better to plow after-tax dollars into Roth IRAs and even do conversions, especially before age 70.
  5. Make your money last.  Here's where I take issue with Jane Bryant Quinn; she asks the wrong question:  "How much [i.e. what percent of your assets] can you safely withdraw from your nest egg each year?".  I especially adore the phrase (referring to the 4% withdrawal rule), "It's too early to know the 30-year outcome for people who retired in 2000 . . ."  I never would have guessed.
    The "expert" withdrawal rates quoted in the article range from 2.5% to 5.5%, over a 100% difference! 
    What is a reader supposed to do with that??  I side with Wade Pfau, professor of retirement income at The American College, (from which I received my ChFC designation) who suggests the 2.5% figure plus future inflation increases.  But who has $2,000,000 to work with to meet a $50,000/yr. budget?
    My main issue with this 5th article is that it fails to deal with, or even mention, the #1 risk of market-based (stocks & bonds) income sources:  Sequence of returns risk.  If you need 5.5% of your assets to live on at the same time the market is experiencing double digit losses- possibly several years in a row like in 2001 -it could be impossible to recover.  In the Wade Pfau article it is pointed out that the standard "4% rule" will result in retirement failure for 1 of 3 retirees, a completely unacceptable ratio.
    There are ways, however, to enable 5-6% withdrawal rates with no risk of running out of money and without surrendering your principal to a third party (like AARP suggests you do in the full page annuity advertisement right after their article)  But these solutions vary wildly from state to state.  There is no substitute for a customized analysis of, and plan for, your retirement by a legal fiduciary practicing in your resident state.

Friday, July 18, 2014

Ten Things Life Insurance Agents Won't Say: #1

Once again, just to be sure, I remind you that the titles of these posts are MYTHS.  And here, courtesy of MarketWatch's Daniel Goldstein, are ten myths all in one place at the same time.  Yum!
I work very hard.  Much of what I do is extremely challenging and complex.  So I love the intermittent easy ones, even if it means occasionally shooting fish in a barrel like this.  Since there are so many fish in this particular Ten Things barrel, I'll snare them one at a time in a series of blog posts.  (But FYI, here are the Ten Things all at once)

Thing #1 "that agents won't say" (because we're* all ignorant crooks, is the implication):  You actually have too much life insurance. 
Before we torpedo that already capsizing assertion, let's first dispose of the myth that you even "need" life insurance.  Life insurance isn't a need.  It is a luxury.  Food is a need.  Shelter is a need.  Love is a need.  Life insurance is a luxury.  People buy it because they want to. Unless they have to, to satisfy a business and/or loan contract or divorce decree.  Life insurance needs analyses attempt to calculate your human economic value to your beneficiaries.  Chances are that they wouldn't need to replace 100% of that economic value.  But don't think the average life insurance policy in force today comes anywhere close, as you'll see later.

As a holistic retirement planner, I stress test all my plans asking and illustrating, "What could go wrong?":
  • What if the market crashes again.  And again?
  • What if rates of return aren't as good as we expect?
  • What if inflation rears its head?
  • What if one or both of you needs long term care?
  • What if one of you dies?
  • What if you lose your job?
  • What if you don't wait to age 70 to turn on Social Security?
The death of a high income spouse can be devastating.  And in these days of dual income households, the death of either spouse can derail the most carefully crafted plan.  Which is where life insurance comes in.  Leading to why life insurance agents won't say "You actually have too much life insurance".

It's handy when a financial entertainer like Mr. Goldstein disproves his own assertion in the same paragraph:  the average face value of life insurance policies was $163,000 in 2012.  According to StatisticBrain the mean mortgage balance as of 2013 was $188,000.  $163,000 death benefit is "too much"?  I beg to differ.  The reason no life insurance agent will say "You actually have too much life insurance" is this:  It ain't true. (to put it scientifically)

Mr. Goldstein attempts to prove his point by specious comparison, as most sycophants do:
"The average face value of a policy in 2012 was $163,000, up 37% from a decade earlier—a faster increase than the rise in average salaries over the same period, according to the Social Security Administration."

So what?  My Montmorency cherry tree is up 50% over the last decade.  Goldstein assumes the only function of life insurance is to replace income.  And even that false assumption serves only to prove that $163,000 is woefully inadequate to all but minimum wage workers.  (Alluding to the SSA lends the illusion of authority.)  A more relevant fact is, over the same period, the average mortgage balance doubled.  Anyone heard of "debt" as a reason for life insurance?  Such a narrow position is dangerously ignorant and contrary to not only all the evidence but also to how Americans feel about it:

"Forty-four percent of all U.S. households (48 million) either don’t own life insurance and believe they should, or own life insurance and believe they need more. Among those that already own some life insurance, 40 percent believe they don’t have enough."  -LIMRA 2005
Things have not improved in the nine years hence.  I fail to see how the author could possibly think his position is beneficial to his readers.  I call it financial porn.

*Yes I include myself in this group because I retain all the training, experience, and credentials.  And I still sell the stuff because it is so important.

Friday, June 27, 2014

TV, Radio and print media are the best souces of financial advice

Just a reminder:  These post titles are Financial Myths.  In a concisely excellent article at, David Lewis gives us just one of many examples of the hazards of using financial entertainers (listed in the title of this post) as your financial planners.  "What's the problem?" you may ask.
  1. First, financial entertainers are not legal fiduciaries and therefore collect little if any pertinent information from you before handing down their gumball-machine recommendations.
  2. Second, you never hear about the [many] cases where their advice went wrong.  Do you really think they would publish or repeat that?
  3. Third, because their companies are virtually all owned by Wall Street they tend to be biased in favor of products, services & advice peddled by Wall Street.
  4. Their bad math, limited knowledge and resulting bad advice go largely uncontested.
 Case in point is the difference between arithmetic (or "average") and real returns.  The first technique simply adds up a series of annual returns & divides by the number of years.  So if you invest $100 and get 0% & 9% returns over the next two years, your average return is supposedly 4.5%.  A 4.5% annual return would yield $109.20.  But in reality you would end up with only $109, a 4.4% real annual rate of return.  Is it coincidence that average returns are always equal to or higher than real returns?

Finally, for retirees one of the largest income planning risks is sequence of returns risk.  If you've projected that the historically back-tested portfolio you've assembled will give you an adequate average rate of return for the rest of your life, as you draw it down, have you considered the effect of three years in a row of negative results?  Using average returns fails to take into account the effect of withdrawals in declining years, declines from which it is often impossible to recover. 

Friday, June 20, 2014

Inherited IRAs Are Protected From Creditors

Just to be sure it's clear, the titles of these blogs are myths.  So in this case, the confusion about creditor protection of Inherited IRAs has been settled by the Supreme Court just this month:  Inherited IRAs do not have creditor protection.  They don't.

"In Clark, et ux v. Rameker, 573 U. S. ____ (Jun, 12, 2014), the U.S. Supreme Court unanimously held that funds held in inherited IRAs are NOT protected as “retirement funds” within the meaning of Bankruptcy Code Section 522(b)(3)(C) of the federal bankruptcy code." (Thank you

In a surprisingly sensible decision, the Supremes used these tests to determine that Inherited IRAs do not deserve the protections afforded retirement accounts under IRS code:

Unlike other retirement accounts,  Inherited IRAs have these unique features:
  1. The holder of an inherited IRA may never invest additional money in the account.
  2. Holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement.
  3. The holder of an inherited IRA may withdraw the entire balance of the account at anytime—and use it for any purpose—without penalty.
This decision greatly amplifies the importance of careful estate planning for your retirement funds.

Tuesday, May 27, 2014

Trees can grow into outer space

Even though all the numbers look great, most folks on the ground will tell you things just don't feel right.  At least those of us paying attention.  In terms of money & finance, I refer you to the graph below:

You would have to be nuts to not see a pattern here.  Note especially that in 2009 the index was worth 1/3 its current value.  That's only five years ago.  Do you think a "correction" is impending?  I do.  Trees don't grow into outer space.  If I'm right, wouldn't you like to avoid it?  And if I'm wrong wouldn't you like to not miss out on continued growth?  Yes.  You can eat your cake and have it too (an oft misstated aphorism).