Retirement after the great recession – will it still be possible?

I wrote an article a few years ago that was published in the OC Metro in Orange County, California called “Uncle Sam’s Snake Oil.” This article was designed to wake up all the sheeple (that is a half person half sheep) that is just following along and believing that what you’ve been told to be true is true.

There used to be the 3-legged stool for retirement but then the company funded pension went way and the last two legs which were only supplemental have been used to fund a lifestyle after work and has become disastrous. The other two legs are Social Security and the 401k plan which was designed to supplement your retirement and can be decent if you get a significant company match but those are going away.   The real key here is that as our deficit rises beyond $14,000,000,000,000 trillion that is a long number isn’t it? As things rise ever second, we know the only solution is to raise taxes and most likely back to the tax brackets of the 1990s where the top was at 39.6%. If you add your state tax, in California it is another 9.3%, your at 48.9% of your income just to taxes to pay this incredible debt down. That means anyone earning $250,000 or more was taxed as this rate and we hear a lot about that $250,000 income today. However a family of 3 or more needs at least that much just to stay above water in their live in various parts of California s housing and goods and services are explosively high. The proposed Obamacare or the Patient Protection and Affordable Care Act (PPACA) is going to send our taxes to at least these levels. We now have Homeland Security costs, War, underfunded benefits (Social Security, Medicare, Medicaid) and this is a recipe of inevitable higher taxes. In 1993 the family filing  jointly and earning $89,000 to $140,000 was taxed at a 31% rate which is just 4% shy of the highest current tax bracket for multi-millionaires and we are destined to go back to such a rate.

All of this legwork does not even account for how things really work on deferred pension plans and few Americans realized how they are going to be taxed on their retirement plans until they arrive at retirement only to be horrified. Millions run out of money and end up work in their eighties in fast food restaurants or as greeters in front of discount department stores.

So here is a break-down of an average person putting away $4,000 per year for 30 years and reaping that huge tax-deductible benefit and how he ends up paying 10x in taxes back to the government.

Break down of taxes on deferred program

This link depicts what it would look like to save $40,800 over the 30 years prior to retirement only to pay $532,800 in taxes over the time from age 65 to 85. As you can see that little savings in tax was no where near what you still end up paying, hence the perception of the deferred plan is snake oil.

How do these numbers stack up

We want people to know you have to start finding some form of tax-free strategy or you’ll be penniless in a few years into retirement and back out looking for work just to make ends meet. Most do not qualify for a ROTH and you can only put away $5,000 per year which takes forever to get any real build up but there are strategies for the small business owner or solo practitioner to use 401k ROTH strategies…this is way too long of a conversation for this article.

There are muni bonds but which municipality do you feel comfortable with? Most of them are running their budgets like a ponzi and robbing Peter to pay Paul. Even though the interest paid on a municipal bond is tax-exempt, a holder can recognize gain or loss that is subject to federal income tax on the sale of such a bond, just as in the case of a taxable bond. I see a little too much risk in these going forward but a few might not be a bad thing. Unfortunately some folks have turned 95% of their wealth holdings into these which could give a whole new meaning to the word “junk bond.”

The last frontier is exploring tax codes to find access to places to build tax-free and we find that in 7702a which is for life insurance. Now contrary to popular opinion, insurance is not all about you dying. In fact it can provide one of the last vehicles to grow money tax deferred and access it tax-free if designed properly. The caveat is that you must fund for a few years and be consistent like anything else in life. Many let their policies lapse and then the cash values go to paying insurance costs rather than being allocated to a savings component linked to one of our stock indexes.  As I’ve shown before, if you understand the equivalent taxable yield, you’ll understand that if you only did 5.5% in return tax-free that is the equivalent of 7.65%, depending on your tax bracket…it could be a little better if your in a higher tax bracket.

The insurance approach also allows you to pass on a death benefit to loved ones and if you don’t have anyone who loves you then think about it as a final expense policy to cover the costs of sending you to the great beyond which can cost anywhere from $15,000 and UP.  You can be covered for disability and terminal illness and have supplemental tax-free retiree income all with one policy. For folks who don’t qualify for ROTH IRA, can’t do the solo 401k ROTH or have already done as much muni bonds as you’re going to risk; the properly structured ‘savings grade’ life insurance policy may provide a unique combative tool to slay the retirement dragon.

Unpoverishingly,

James Burns

Tax Free Now

To Dream the Impossible Dream – Beating the Stock Market

A few years ago after reviewing some portfolios for clients that tried their hand in stock market trading it was obvious to me that they were gambling as if they were at the roulette table in Vegas. As someone who has worked for a billionaire and observed the asset class relative to stock, the investments were safe blue chip stocks, bonds, Treasuries and Index funds because it is next to impossible to beat the market.  I then wrote my first book The 3 Secret Pillars of Wealth that discusses the fundamentals of what is an investment and what to look for every-time you start to consider an investment.  Benjamin Graham who was the mentor of Warren Buffet stated an investment was something that preserved principal and provided and adequate return.

In the book we also discuss John Bogle, the founder of Vanguard Investments, views on investing and trying to beat the market. Mr. Bogle’s academic research proved that virtually no one could consistently beat the market over long stretches (like the 35 years we have to invest for retirement). The best you could hope for was to meet the market, which gave you returns that weren’t half bad. in my book we recount the research of looking at 355 mutual funds over the 35 years and that only 3 of them did anything compelling and that was in line with what the S&P 500 did. Hence, the idea is that going forward how would the average person who works uncover those 3 funds out of the masses; you can’t is the answer.

To this end, Mr. Bogle said we need to invest in a broad swath of stocks and bonds through low-cost index funds and forget about your portfolio. Spend your time living your life instead of researching stocks and bonds. That’s much more fun than sweating over investments anyway. If you’re going to research anything it would be real estate and starting your own business as other assets.

The other pundit of the idea that almost no one beats the market is Terrance Odean, a Berkeley professor who proved Bogle’s theory from another perspective. The more you trade, the more you lose, Odean discovered by examining the real-life portfolios and trading patterns of thousands of investors. His paper, Boys Will Be Boys, is a must-read for anyone who is trying to retire in comfort and not run out of money and for those who think they’re going to outsmart the stock market. You know the guys who have a super large screen in their office and they seem to be following the market and making trades. What they are really doing is creating taxes with capital gains and many of them short term which costs more, all for what?

Steady and consistent gets to the finish line if we remember what Aesop tried to teach us in the story of the Tortoise and the Hare. The best way to invest with success is to get base hits and not try to get a home run all the time. If we look at baseball, a home run is great but really you accomplish more if you get a base hit and move it one base at a time to home plate; this is better than striking out.

James Burns, Esq.

Survival of the Smartest in Retirement

An estimated 47 percent of Americans born between 1948 and 1954 may not be able to afford basic expenses and uninsured health-care costs through retirement, according to the Washington-based Employee Benefit Research Institute. EBRI has a database of 24 million 401(k) participants and 20 million Individual Retirement Accounts.

“The risk of outliving one’s assets in retirement, or longevity risk, has been placed squarely on the shoulders of workers,” said Assistant Secretary of Labor Phyllis Borzi said in testimony for the hearing. The life expectancy of a 65-year- old U.S. male is 82, and 85 for a 65-year-old female, according to the Social Security Administration.

There are solutions for guaranteed income contracts for life which makes sense to add to your planning. This provides predictability on outcome rather than riding the roller coaster of the market.

James Burns, Esq.

Health (scare) Care Reform and an Insidious Tax it Releases

The new Health care reform bill includes a 3.8 percent Medicare tax on unearned income including annuities, and possibly income recognized from the surrender or sale of life insurance.

Many clients have asked how to get out of annuities they don’t need to minimize a potential huge tax hit. This is only if you don’t think you’ll need this income as we can move it to an insurance policy that is free of the tax, leaves a legacy and still provide some income for you and your family.

This strategy spreads out potential tax payments over a 7-year period and moves funds from an existing annuity where funds are trapped and destined for taxes to efficiently transfer your wealth through life Insurance.

The benefit to you is that you keep more of what you earned and leave more to your family who should be the recipients of all your hard work.

Don’t fail to plan or get information on how this might affect you as the outcome could be disastrous.

James Burns