401(k) funds studied for less time than car purchases

By Walter Hamilton (originally published on LATimes.com)

Americans know that 401(k) retirement plans are important, but they spend only a moderate time researching investments and are often confused about how to pick the best funds, according to a new survey.

Nearly nine in 10 workers view 401(k) plans as essential employee benefits, far outdistancing disability insurance, extra vacation days and the option to work from home, according to the poll by Charles Schwab Corp.

But the typical employee spends only about two hours analyzing 401(k) choices, roughly half the time spent researching car purchases or vacations.

The typical employee spends only about two hours analyzing 401(k) choices, roughly half the time spent researching car purchases or vacations

The typical employee spends only about two hours analyzing 401(k) choices, roughly half the time spent researching car purchases or vacations.

Half of poll respondents said their 401(k)s are more confusing than the medical plans.

Only about one-quarter of survey participants have sought professional advice with their 401(k)s, according to the survey. That’s far less than the 87% who pay a professional to change the oil in their car.

“With so much at stake, the industry needs to take a more active role in delivering personalized investment advice to help individuals’ 401(k)s work harder for them,” said Steve Anderson, head of Schwab Retirement Plan Services.

One-for-all default investments, such as target date funds or balanced funds, can’t be expected to meet the individual needs of workers,” he said. “The industry can do better.”

However, earlier research has shown that employees must be extremely careful about 401(k) advice.

It’s not in the brokerage house’s best interests to make things simple. It’s better for them to offer a wide array of funds for two reasons: 1) Those customers who are financially astute demand it and 2) a wide variety of funds makes it easier for their sales weasels to work…

A study by the U.S. General Accountability Office in 2011 found that what passed as education offered by firms running 401(k) plans often was little more than a sales pitch designed to push high-cost investments on unsuspecting employees.

Follow Walter Hamilton on Twitter @LATwalter

 

From Michael Goodman -

If you want to discuss your retirement planning.  Let me know.  I can show you ways to increase your retirement income while keeping your money safe from market losses, turn some or all of it into tax-free distributions, allow you to access some of your money at any time and for any reason without taxes or penalties.  Do you just want to follow the crowd and get what they get?  Or would you like to learn another way that may be better for you?  The conversation is free.  Send me an email.

Just remember, I can only offer advice to residents of California.

 

Posted in Annuities, Life Insurance

IUL or 529?

What’s the Best Way for a Parent to Save Money for Their Child’s College Education?

There are a variety of programs that offer tax benefits to help you save money for your kids college education. Some of them offer immediate tax deductions and income tax deferral and some don’t. Most require that the money be spent on educational expenses or there will be a tax penalty, or at least loss of the tax benefits. Most importantly, when the kid finishes school, the money is normally used up. I’m going to tell you now about one of the greatest financial tools you will ever see or hear about.

An IUL (indexed universal life insurance policy) for a child gives you the opportunity to leverage a small amount of after-tax money while your child IS a child into a LIFETIME of tax-free financial benefits. To maximize the benefits for college, the policy should be bought ASAP after the child’s birth. There is no medical exam needed; the child just needs to be born healthy. These policies are issued very quickly.

Obviously, the chances of a young child dying is very small, thus the cost of insurance is extremely low. Part of the money you pay into the program will cover this cost of insurance plus any fees, and the rest will go into the cash value account. Like any other IUL, the growth of the cash value will be tied to the growth of a stock market index that you will choose, most often the S&P 500. Please note that your account is not actually invested in the market, the growth rate is simply determined by the market.

When the index goes up, your account will earn interest. When the index goes down, you will be protected by a guaranteed floor of 0%. Your cash value can NEVER go down because of the market, making this a very safe place to put money. To pay for this floor, there will be a “cap” to how much of the market growth can be credited to your account. If the cap is 14% and the market goes up 10%, your account will earn 10%. If the market goes up 20%, you will earn 14%. If the market goes down, you will earn 0% and your cash value will stay the same. With a cap of 14%, your cash value will grow somewhere between 0 and 14% every year, after the cost of insurance has been deducted.

How does this work out? Assuming the market continues to grow at its 30 year average rate of 8.39% and you put just $100 a month into the account through age 18 (then STOP), you should have tax-free access to $10,000 a year for each of four years of college, PLUS a $50,000 tax-free distribution at age 35 (house down payment?), PLUS a tax-free distribution of $250,000 at age 55 (pay off or pay down the house?), PLUS tax-free annual distributions FOR LIFE of over $200,000 a year starting at age 67! On top of this, the death benefit will have gone up from $115,000 at issue to over $1.6 million at age 66, with no additional out of pocket cost.

These distributions are just illustrations and are not set in stone. There are a million variations on when and why you might take the tax-free distributions. We assume that the parent (or a grandparent) will buy the insurance for the kid and will own the policy until they believe the child is ready to take over ownership of the policy.

Can you deposit more than $100 a month into one of these polcies? Yes, to a limit.

Does the child have to be an infant? No, but to maximize the growth, should be as young as possible.

Is the growth guaranteed? No, it will depend on the growth of the index tied to the account.

Are there any other catches? Yes. Two people -  parents or grandparents -  must have a life insurance policy with the same company. It can be a term policy, whole life, or IUL.

Any other questions?

 

Michael Goodman

Life Insurance Agent, Santa Clarita, CA

 

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Wall Street Math

 

WALL STREET MATH

By Michael Goodman

On January 1, 1984, the S&P 500 stood at $164.93. Over the next 30 years,
it grew to $1,848.36. The annual returns were: (read down the first column, down the second column, etc)

1.4% -1.5% 9.0%
26.3% 34.1% 3.0%
14.6% 20.3% 13.6%
2.0% 31.0% 3.5%
12.4% 26.7% -38.5%
27.3% 19.5% 23.5%
-6.6% -10.1% 12.8%
26.3% -13.0% -0%
4.5% -23.4% 13.4%
7.1% 26.4% 29.6%

If you total these up and divide by 30, you will get an average return of 9.84%
(not including dividends). But did the S&P 500 actually grow at a rate of
9.84%? Using my HP Business calculator to do the time value of money calculation,
I find that when $164.93 grows to $1,848.36 over 30 years, the actual annualized
rate of growth is 8.39%. What’s up?! Why is the actual growth rate 1.5% LESS
than the average rate? The answer is Wall Street Math.

Anytime you average a series of numbers that includes negative numbers, this
problem will arise. Just think about this simplified example. If you invest
$100 and it goes up 10% in the first two years, then goes down 20% in the third
year, what is your rate of growth? The AVERAGE of these three years is zero%
(10, 10, -20 = 0/3= 0%). But did your investment actually break even? NO! Your
$100 goes up 10% to $110 after one year; goes up 10% to $121 after two years;
then goes down 20% to $96.80 after the third year. You lost $3.20 over the three
years, a “growth” rate of -1.07%. When an investment goes down by
ANY amount, it must go up a HIGHER percentage to break even. If a $100 investment
goes down 20%, you now have $80, right? It now needs to go up by 25% just to
break even ($20/$80 = 25%).

The point of this is that it’s not unusual to hear Wall Street guys talk about
the average growth rate of the market over a period of time. BEWARE of averages
used to describe the growth rate of securities when there is a chance of loss.
Those numbers are NOT accurate.

How does this apply to your retirement and IUL’s (indexed universal life policies)?
If you turn all of those red negative numbers above into zeros, then change
the growth numbers that are larger than 14.5% into a 14.5 and average the numbers,
you get the growth rate of an IUL with a cap of 14.5% and a guaranteed floor
of 0%. That growth rate was 8.56% during the same years that the S&P 500
was growing at 8.39%.

Keep in mind that all IUL’s are not the same. Just as your investments in the
market have costs and fees, part of the premium paid for an IUL also goes to
fees and the cost of insurance. Every company charges different amounts for
the cost of insurance and other fees, and many companies have caps that are
less than 14.5%. To get an IUL with the lowest costs from a strong carrier, your agent must work with the right insurance companies and he’s got to know how to design a policy that
maximizes growth of the cash value.

The only way to know how an IUL compares to other financial options is to speak
with a good agent and get a quote/illustration. If you’re in the state of California,
send me a note HERE.

Michael Goodman

Life Insurance Agent in Santa Clarita, CA

 

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Don’t fall into these Social Security traps

(I find that MANY of the clients I work with are not aware that the income from their pensions and “qualified” savings plans (like 401k’s and IRA’s) will make their Social Security income taxable. This is one of the areas where an IUL is especially effective for retirement planning, because the distributions from an IUL are income tax-free and will NOT cause your Social Security income to become taxable.

Michael Goodman)

(this article was originally posted on MSN.com and you can see it HERE)

By Kandice Bridges, BankRate.com

If you’re looking forward to turning age 62 so you can begin collecting Social Security benefits and live on Easy Street, you might get caught off guard. Some of the Social Security rules can be frighteningly complex. Because it will likely represent a large portion of your retirement income, it’s important to understand how the government program works.

For instance, there are limits on how much you can earn while collecting benefits, and if you exceed those limits, your Social Security benefits will get cut substantially. That’s just one of the snares that could trip you up.

Make sure you plan appropriately to avoid these six Social Security traps.

Trap No. 1: Social Security may be taxable

If your earnings exceed a certain level, up to 85 percent of Social Security benefits may be taxable. Even income sources that are normally tax-exempt, such as income from municipal bonds, must be factored into the total income equation for the purpose of computing tax on Social Security benefits.

Eric Levenhagen, CPA and Certified Tax Coach with ProWise Tax & Accounting, says to find out whether any of your Social Security benefits are taxable, “Look at your total taxable income plus half of your Social Security benefit. Make sure you add back any tax-exempt interest income.”
When your taxable income, tax-free income and half of your Social Security benefit exceed $25,000 ($32,000 for married couples filing jointly), that’s when you’re in the zone to pay taxes on Social Security income.

Another unexpected income source that could impact taxes on Social Security: proceeds from a Roth conversion. If you’re thinking about doing a Roth conversion, do so before receiving Social Security benefits, says Steve Weisman, an attorney and college professor at Bentley University. “A lot of people considering converting a traditional (individual retirement account) into a Roth IRA should be aware that if they do that, they will end up paying income tax on the conversion, which will also be included for determining whether Social Security benefits are taxable,” he says.

Trap No. 2: Must take required minimum distributions

Required minimum distributions, or RMDs, must generally be made from tax-deferred retirement accounts, including traditional IRAs, after a person reaches age 70 1/2. The distributions are treated as ordinary income and may push a taxpayer above the threshold where Social Security benefits become taxable.

“This is a double-edged sword,” says Weisman. “If you are over 70 1/2, you are required to begin taking distributions from IRAs (except Roth IRAs) and other retirement accounts.”

“Here again, you take half of the Social Security benefits plus all other income to determine whether Social Security benefits are taxable. RMDs will be included and drive that up,” says Levenhagen.

You can’t avoid required minimum distributions, but you can avoid being surprised at tax time.

Trap No. 3: Some workers don’t get Social Security

Most people assume Social Security is available to seniors throughout the U.S., but not every type of work will count toward earning Social Security benefits. Many federal employees, certain railroad workers, and employees of some state and local governments are not covered by Social Security.

“Some of my clients have participated in retirement programs offered by employers that don’t pay into Social Security,” says Charles Millington, president at Millington Financial Advisors LLC in Naperville, Ill. “If your employer does not participate in Social Security, then you should be covered under the retirement program offered by your employer.”

However, certain positions within a state government may be covered by Social Security.
Find out whether your employer participates in Social Security or not and if not, whether your position may be covered by Social Security. Make sure you understand where your retirement benefits will be coming from.

Trap No. 4: Early benefits could be a big mistake

If you opt to take Social Security as soon as you are eligible, you may be doing yourself an injustice.

“If you delay taking benefits until age 70, you will see as much as an 8 percent increase in benefits for each year you delay,” says Steve Gaito, Certified Financial Planner professional and director of My Retirement Education Center. “In addition to receiving a higher benefit, the annual cost-of-living adjustment will be based on the higher number.”

“It’s hard to find that kind of rate of return on regular investments, so it’s good to delay if you can,” says Weisman.

Of course, life expectancy plays a part in the decision of when to begin drawing benefits. “You generally know how healthy you are and what your family medical history is,” says Ryan Leib, vice president of Keystone Wealth Management. “We advise clients to determine whether they think they will live longer than age 77. If so, delaying until age 70 will net you more in benefits than opting to start collecting benefits early.”

If you’re able to live off other funds and delay taking Social Security, you should seriously consider doing so. “Delaying taking Social Security until age 70 could mean the difference between cat food and caviar in retirement,” says Leib.

Trap No. 5: Windfall elimination provision

If you work for multiple employers in your career, including both employers that don’t withhold Social Security taxes from your salary (for example, a government agency) and employers that do, the pension you receive based on the noncovered work may reduce your Social Security benefits.

“Many people are not aware that their actual Social Security benefit may be lower than the amount shown on their statements or online because the windfall elimination provision reduction does not occur until the person applies for their benefits and (the Social Security Administration) finds out they are entitled to a pension,” says Charles Scott, president of Pelleton Capital Management in Scottsdale, Ariz.

Social Security applies a formula to determine the reduction. In 2014, the maximum WEP reduction is $408. There is a limit to the WEP reduction for people with very small pensions.

If you have worked for both noncovered and covered employers, don’t let the windfall elimination provision catch you by surprise.

Trap No. 6: Limits on benefits while working

You are allowed to collect Social Security and earn wages from your employer. However, if your wages exceed $15,480 in 2014, your Social Security benefits will be reduced by $1 for every $2 you earn above that level.

During the year in which you reach full retirement age — which ranges from age 65 to 67, depending on your birth year — you can earn up to $41,400 before $1 of your Social Security benefits will be deducted for every $3 you earn above that threshold. However, the money isn’t lost forever. You will be entitled to a credit, so your benefits will increase beginning the month you reach full retirement age.

At full retirement age, no income restrictions apply. “There is no penalty for additional income earned,” says Gaito.

If you plan on working beyond age 62 and anticipate earning more than $15,480 per year, strongly consider putting off Social Security benefits.

 

To discuss how to convert some of your currently taxable income into tax-free distributions, please Contact Me

Michael Goodman
Life Insurance Agent, Santa Clarita, California

 

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The IUL Advantage – Case Study 1

I’ve been talking to a potential client and would like you to check my math and give your opinion. This woman is a healthy 37 year old with a good job who will have a nice pension when she retires, but no Social Security. She has been saving $1,000 a month in recent years and depositing it in a qualified plan, where it’s been invested in cash because she’s afraid of losing her money in the market, so it’s earning no interest. She’s single and still lives at home with her parents, so she’s getting killed on taxes, but the tax deduction helps a bit. The beneficiary of her qualified plan is her brother.

Here’s my analysis – “If you continue on your current path, you’ll save $336,000 through age 65 (not including the money you’ve saved already). You’ll earn some income tax deductions (maybe $117,600 if you’re in the 35% bracket) but that’s it.

Let’s take a look at what might happen if you earn 6% on the same money. $12,000 a year saved for 28 years at 6% will grow to $822,337. But there are two questions –

1. How will taxes affect you later?

2. Where can you safely earn 6%?

Let’s talk about taxes first. If you stay on your current course and have $336,000 (plus your previous savings) for retirement and take out just the recommended minimum distribution (1/21 at age 65) to supplement your pension, that’s $16,000 per year, with all of it taxable. That’s about $5,600 in taxes, leaving you about $10,400 per year from all your years of savings.

Assuming you can find an approved investment for your qualified plan that earns 6%, your $822,337 will pay out at $39,158 per year, all of it taxable. 35% taxes will eat up $13,705, leaving you with $25,452 per year, net.

One other thing, if you were to die before reaching retirement, your brother would receive the balance in your account and MAY be taxed in the year he receives it as regular income, resulting in a huge tax bite.

But, do you know of any investments that are approved for your particular qualified plan that will consistently yield 6% without risk of loss? I only know of one that gets close. An indexed annuity with an income rider. Using one of these can achieve that last scenario with costs of less than 1% per year. You can even reduce the tax bite by putting $5,500 a year into a Roth IRA because the future payouts from the Roth will be tax-free. This strategy will get your retirement income up to about $30,000 per year, net.

But there is one other strategy that we have discussed, the Life Insurance Retirement Strategy. Using an IUL (indexed universal life policy) the way we have discussed, you would only put HALF your future savings into the IUL ($500 per month through age 65) without fear of market losses, then you could take $70,000 per year TAX-FREE for life (assuming the S&P 500 performs the way it has for the last 30 years and based on the expected cost of insurance and fees for a healthy 37 year old woman). That’s more than double the results from half the savings! (you could still put the other half of your savings into a Roth and increase your tax-free distributions even more!)

On top of this, if you die before reaching retirement (or after), your family would get at least $511,417, income tax-free.”

What do you think? Should she -

A. Continue putting $1,000 a month into a qualified plan earning nothing?

B. Put $500 into a Roth IRA and the other $700 into the existing qualified plan, with both accounts going into an indexed annuity that earns a guaranteed 6.75% with the income rider at a cost of less than 1% per year (and also gets a bonus of 10% on all premium deposited in the first 7 years)?

C. Put $600 a month into the Life Insurance Retirement Plan using an indexed universal life insurance policy (IUL) and max fund a Roth IRA?

D. Do something else?

Keep in mind that this client is very risk-averse, so stocks are not a good choice for her.

I welcome your opinions.

Michael Goodman

Life Insurance Agent, Santa Clarita, California

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