Why Sabotage your Retirement?

There are five destroyers of wealth.

1. Taxes

2. Inflation

3. Procrastination

4. Expenses

5. Debt

So if we know these five exist that eat away our gains and slow our progress, then we know where not to invest. Debt and procrastination are personal things but the other three can be avoided. The typical vehicle most people use are mutual funds. There are now more mutual funds than there are stocks on the exchanges so one has to ask why. This is because of the tremendous money that is harvested off of them by greedy financial institutions.

How do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return. When you hear that, don’t you feel like you’re taking one or two steps back instead of going forward?

Taking what we now know, the best place to avoid expenses would be an index fund but if we buy the index inside a life insurance chassis, then we can eliminate the taxes under the Internal Revenue Code Section 7702 which allows tax-free build-up and tax-free distributions back to yourself because it is characterized as a loan. Now that we’ve eliminated two more destroyers the only one is inflation. As long as you can earn an internal rate or return that out paces the 3% of inflation which is possible when you have the right product you can eliminate all 5 destroyers of wealth and get so much further ahead.

If you want more information look for the book “The 3 Secrets of Wealth” on Amazon or contact the author of this blog.

Tax Free Retirement

Uncle Sam’s Snake Oil

Uncle Sam and his band of merry-men, better known as Congress, have been pushing snake oil on the unsuspecting public in the form of retirement plans. But wait, isn’t a pension plan one of the perks we look to when shopping for an employer? Well, not all pension planning is created equal and in most cases, quite disastrous.

Distributions from all qualified plans must begin no later than April 1st of the calendar year following the year that the participant attains age 70 1/2, or the calendar year in which the employee retires. Special rules apply if the distribution is made to a 5 percent owner of the business. The purpose of minimum distribution rules for retirement plans is to force the owner or participant of the pension plan to withdraw money from the plans, thus triggering an income tax on these monies. On April 16, 2002, the Internal Revenue Service issued final regulations as to these distributions.

Generally, the idea pursuant to the regulations is to have the owner or participant of the pension plan begin taking the money out of the pension plan beginning at the later of when he finishes working or age 70.5. One purpose of this is to insure that these monies will be subject to income tax prior to the death of the owner.[1]

Based on the current system the government has created with pension plans, the average retired couple will pay eight to twelve times more in taxes on their IRAs and 401(k)s during their retirement years than they saved during their contribution and accumulation years.[2] Generally, it is understood that you put money into your pension plan and tax is deferred and this is a great thing. Unfortunately, you may well be in a higher tax bracket if your pension accumulation is done right.

In addition to a higher tax bracket upon reaching retirement, many people find themselves with a free and clear home; they no longer have mortgage interest deductions to offset income tax. Many Americans find they are now paying back everything they saved in taxes during their accumulation and contributions years within the first two years of distributions. Therefore, there is an insidious income tax awaiting most people and if they didn’t plan their estates, double taxation in the form of both income and estate tax.

Many postpone the transfer of their qualified funds until age 59 ½ in order to avoid the 10% tax penalty. Sometimes by delaying the payment of taxes, retirees will find themselves in a higher tax bracket after age 59 ½ because Congress could raise tax rates because of a political change. Inevitably, one must pay the piper now or later.

What is the answer? Simple, savings grade life insurance. This type of life insurance is not the same as the one you get countless letters about in the mail. This is life insurance that is focused on building up a triple compound because it is tax deferred. The difference between the deferral that life insurance experiences and pension plans is that when it comes time for payout, life insurance is received as a loan. This is a powerful concept because the proceeds will not be taxed; loans are not a form of taxable income. However, as a loan you will have interest on the payments. Most people mistakenly think they are going to pay interest on their own money with life insurance. While in theory that is true, the best insurance carriers provide for zero wash loans where the interest basically is forgiven or taken out of the death benefit when a person passes on. We are talking about real life insurance not the typical death insurance that most people have because you use it while you’re alive.

The best candidates for creating amazing wealth with Savings grade life insurance are those in the age rages of thirty to fifty. Once committed and in the proper product it is foreseeable they will retire wealthy and without the annoying taxation that surrounds a pension plan. There are even strategies to start a contribution plan to your investment that only requires repositioning your current finances.

Social Security received a 2.7 percent boost in 2005, but Medicare will continue to eat up much of the increase and when the 79 million qualifying Americans sign-up – for Social Security look out below. This does not even account for the bail out with TARP funds that President Obama awarded bankers and the fact we are headed for Debtflation.

Long Term Nursing Care – are your prepared?

Many states have a high cost for long term care and nursing but California is very explosive in expenses.

State Median Annual Care Costs for 2010 are:

Nursing Home Care

1. Private Room                                                      $87,345
2. Semi-private Room                                          $73,000

Assisted Living Facility

1. Private, one bedroom                                     $42,000

Adult Day Health Care

1. Adult day health care                                    $20,020

Home Care

1. Home health aide                                           $46,904
2. Homemaker Services                                   $45,646

The statistics are that 7 in 10 people will require one of these types of long term care in their senior years. The question is what have you done to take care of this potential problem?

You need to look at a long term care policy or better yet, an insurance policy that provides for supplemental retirement income but also has living benefits if you need them like nursing care. To ignore the numbers is to ignore a fact like you’re going to get old and that everyone has to pay taxes. You need to be responsible to your loved ones and in order to preserve all that you are and have worked for from going out the window to pay for this.

James Burns, Esq.

www.jamesgburns.com

Domestic Financial Terrorism – How do we defend?

The level of destruction on our financial system is incredible compared to what even Timothy McVee did as a domestic terrorist. You have to ask yourself who do some of these bankers and investment firms work for when you look at what they’ve done to the once wealthiest nation in the world.

Right now we’ve got $2 trillion in short-term debt that has to be refinanced this year of 2010 and China, India and Russia are not buying. This is not counting the extra deficit spending which should top $1.35 trillion this year…more or less. The fact the countries we’ve relied on are not buying means we have to fire up the printing presses again. We would already acknowledge that we are at a 10% inflation but the money folks have been using tricky phrases like “core inflation” which ignores half the things we spend money on so that way they can keep the numbers looking low.

A great book called This Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhard and Kenneth Rogoff shows that EVERY TIME a nation’s debt went above 90% of GDP or Growth Domestic Product…the nation failed. The book studies 25 countries over 800 years and there were NO exceptions to the 90% rule. Every nation that ran their deficits to this 90% ratio is now off the map or turned Third World.

Right now, the US is above 90% and there appears no way to bring it down for decades unless some obscure genius comes out of the woodwork as they are not in the White House, Treasury or Fed.

It is unclear what Americans will do, especially for their retirement as the very tool our bankers use against us (stock market) they expect us to hand over our life’s savings and just be ok with negative 30 or 40% loses. You know, its just the market reacting and it goes up and down. Why is that Ok? Why should we accept losses that take us forever to recover just to get back where we started be considered alright?

We need to redo some of the Healthcare Reform Act that President Obama so valiantly promoted before 2013 when our investments could be ravaged with a sur-tax just because we are in a certain income bracket and that bracket is not hard to be in if you live in a state with a high cost of living. Where is Sarah Palin and the Tea Party when we need them.

It is time to look at guaranteed opportunities that does not go down when the market goes down. When Wall Street was once honorable a man named Benjamin Graham (mentor to Warren Buffet) extolled what was an investment. It preserved principal and gave an adequate return. We need to get back to this simple idea and quit trying to find home runs since base hits get you to home plate just as well.

We also need tax-free strategies to weather the storm our own government and their brainy bankers have left before us. It was like turning on the gas to an already smoldering economy.

James Burns