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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.