Friday, December 30, 2011
Along with the Euro, the US dollar is a downward march. The devaluation of the US dollar is always relative to another currency, but this still is a concern. The US currently economy is not suffering from the issues that are talking place in Europe or in Greece, but we are gradually moving in that direction. The Federal Reserve is keeping interest rates low, purchasing US Treasuries. Let us not forget the Federal Government's implementation of a over a $1 trillion dollar stimulus package, Obamacare, various bailouts, TARP, and various expansionist spending programs are not helping in the dollar's cause for strength. Typically the objective with expansionist spending policies implemented by the Federal Government is to move the Aggregate Demand curve to the right or increase production. In this theory, it brings a trade off. That trade off is inflation and other economic issues. The prices of goods can be impacted, how does the factor into our economic recovery?
There are questions posed to me on why banks have not invested their Federal Reserve Quantitative Easing funds into the market. My retort to these queries is the following, "Why invest 'free money' into the market when the market seems to have so much uncertainty?" The Fed is injecting the banks with cash at a very low interest rate. The banks are just rebuilding the reserves that were lost from the Real Estate market crash and they are preparing to make the next run. Banks and Investors are looking for places to park their cash, but the problem is where? Stocks are in decline, but not just here in the US, but in other markets as well. For example, Stocks in Asia are in decline as per this article. There is a large amount of market uncertainty and risk for these investors to feel comfortable. The volume of trading for stocks are no where near the levels of the 1990s.
If one is choosing Real Estate, the market prices have not fallen to the proper levels with the recent correction. In the residential market, the fundamentals are just not there to provide a large influx of cash for home buyers. Of course, with unemployment circa 8.6%-10%, it just does not make sense for banks to re-loan out cash, only to see these Mortgages jettison out into the secondary market again hoping that the home buyer does not default. This of course would lead the economy back to the year 2008 with another Real Estate market correction. It is difficult to loan out money when people are unemployed. Furthermore, banks are still attempting to deal with the large volume of distressed properties on their financial statements.
Currently, many investors are investing into Gold and other commodities. Some economists and financial analysts feel that this asset group has a looming bubble. If one is concerned about the Gold bubble, many Commodity experts state there are other opportunities to explore in this asset class. If the Governments continue to spend and "print" money viz a viz Quantitative Easing, Bailouts, and similar ersatz expansionist monetary/fiscal policies, the demand for Gold and other commodities will increase. The question remains how long the run will last for Gold? Time will only tell. The concern for investors with Gold is with the price at record highs, is it too late to enter this market? If a flood of cash enters into Gold, will it crash in a similar fashion as Real Estate in the 2000s and Equities in the 1990s?
In closing, the current macro economic climate is a intricate conundrum. The declining US Dollar, US Federal Government's high debt totals, a stagnant equities market, a precipitous Real Estate market , soaring commodities prices, and looming inflation are all concerns for the US Economy. One thing holds constant and steady: Congress and our Politicians in Washington DC are engaging in political shenanigans and chicanery. Their "solutions" have contributed to this financial kerfuffle, but we the people must take some of the blame as well.. The complex economic puzzle extends globally, revealing how inter connected each of the countries' respective markets are to each other. There are no simple solutions to these issues. However, if one is a savvy investor, there are still opportunities in 2012 to make some serious cash.
Thursday, December 29, 2011
Monday, December 26, 2011
Tuesday, December 20, 2011
Saturday, December 17, 2011
Sunday, November 27, 2011
Saturday, October 1, 2011
This assumption of "You will be at a lower tax bracket at retirement" is simply preposterous. It assumes that taxes are in a state of Ceteris paribus. Ceteris Paribus is defined as "all things being equal" or "all things held constant". There is one thing that is in this state of Ceteris Paribus regarding taxes: When a person is alive, he will pay taxes, and when they die; they will pay more taxes. Since most plan on being alive during retirement, then the odds are very strong that taxes will be levied. The question still remains how much those tax rates will be at retirement.
401k type plans reward immediate behavior for the contribution into the plan. Annual contributions by the investor allows them to "write off" their taxes up to a annual contributory limit based on the particular qualified plan. Now do not forget the other added benefit to these plans: The ability to grow your money tax free!
At retirement, the plot reaches its climatic peak: The person withdraws their funds only to discover that they are taxed at the current tax rate based on the amount of withdrawal. The tax savings accumulated during the 40+ years of employment, pale in comparison to the tax liability assessed at withdrawal. Of course if a person lives one year after retirement, then they have saved money on taxes during the contribution years. Who works 40+ years and has an objective to die the 1st year after retirement?
Since most people live beyond their 1st year of retirement, the next question is this; how long will this money last? Taxes, Health insurance, living expenses all must come from these qualified accounts. Its obvious that a retiree's needs will be greater than just living expenses.
Since the tax rates have been the lowest they have ever been in the last 50+ years, it is safe to assume that taxes will rise. It is also safe to assume with the trillion dollar Federal Deficit, issues with Medicare, Social Security, Trillion dollar US debt load, these items must be paid with tax dollars. These things typically are paid with either income taxes or via payroll taxes.
Taxes levied will eat into those retirement funds, and over time the 401k funds will run out for the investor. A question to the reader: What things are in your financial plan to help prevent this financial disaster? Ponder on that question based on the current state of affairs.
Robert Williams Jr
Monday, September 26, 2011
In this shocking piece from the Wall Street Journal, the article discusses how pension funds are taking a hit from the vicissitudes of the economy. For many investors, they are not as experienced in the world of investing as compared to most Pension Fund managers. This begs the question: If the Pension Fund managers are struggling, how is the average investor doing?
Saturday, September 24, 2011
Thursday, September 22, 2011
I just stumbled onto an interesting article from Yahoo.com titled discussing the Dow dropped 400 points. Investors around the world are concerned about another recession. For your retirement planning; are you planning for downside risks in your 401k? What is your plan to mitigate these issues?
In this Yahoo.com article, "Obama Debt Plan May Hit Your Retirement", it lays out the proposed plan that the Federal Govt may either raise taxes or cut benefits for Medicare. This potential action prompts questions for Baby Boomers. How will these cuts impact the current benefits? What taxes will be impacted? How does this impact your retirement planning?
Most are waiting for the election of 2012 to see how Mr. President Obama, Presidential Candidates, Congress, and others will debate this issue. Proactive people should be looking for alternatives to deal with the strong possibility of increased taxation on their hard earned retirement funds.
Wednesday, September 21, 2011
Saturday, August 20, 2011
Let’s go back in time and to a different Continent. As we design this time machine, we will go back to around the 1630s to Holland-the home of the first recorded Economic Bubble. But before boarding this Delorean, let us look at some things here first. Let us take this quote from the great Economist, Ludwig von Mises:
“He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief; accordingly he will restrict his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding.” (Mises, 1998, p. 423)
As our time machine has landed in Holland, we picture the citizens of Holland speculating on Tulips. The actual pricing is nebulous but, in circa February 1637 the price of Tulips hit their peak; and then dropped precipitously (Wikipedia, 2011). Prior to this drop, people were selling all sorts of possessions just to get their hands on precious tulips and as a result, the hysteria was on! “People selling or trading their other possessions in order to speculate in the tulip market, such as an offer of 12 acres (49,000 m2) of land for one of two existing Semper Augustus bulbs, or a single bulb of the Viceroy that was purchased for a basket of goods (shown at right) worth 2,500 florins." (McKay, 1841).
Soon after the drop took place, it finally ended circa May of 1637--where the estimated price at that point was well below the level predicted earlier that year in February; but at the level predicted November of 1636 (Wikipedia, 2011). The hopes and dreams were gone and vanished. Soon the Dutch were at a point where not one Tulip Bulb could be sold at any price in the winter of 1637 (Sayre, 2011).
As we board our time machine and visit year 2011, we have just seen a similar scenario in the Real Estate market. A countless number of workshops, infomercials, info packages, RE Gurus, etc appeared between in the marketplace between the years 2004-2008. These gurus were experts sent to us to help everyone become wealthy via Real Estate; specifically through flipping houses. Flipping homes is highly speculative venture. Banks were loaning money based on this speculation on the hopes that the prices would increase and the borrowers would pay back at a higher rate of interest.
The Banks were willing to deplete their cash reserves in exchange that this form of speculation would eventually yield a handsome profit. Of course, both the Federal Reserve and the US government made this particularly easy by establishing lower interest rates on the loans. However, similar to the Tulip mania, this too fell down like a deck of cards. The Law of Diminishing Returns and the Economic concept of elasticity do not discriminate. Now in cities, many homes are overbuilt and the vacancy for home inventories increased due to foreclosure, which is parallel to a similar event that took place in the 1600s-the crash of the tulip mania- one can conclude ultimately that the net effects both events are no different.
This same tale can be reviewed in the 1990s with the Tech stock bubble also, or other asset bubbles throughout history. A current tale is brewing with Baby Boomers with their investments inside of 401k type plans, and currently they are seeing great losses as they are approaching retirement.
Of course the current battle cry is investing in Gold, which has its upsides; and also some obvious flaws. Gold is not immune to the aforementioned Economic Principles too. Savvy investors realize this, and have retained most of the Gold reserves waiting for the lemmings to drive up the price more.
How can you protect your hard earned wealth from these types of mania attacks? You must become educated in how the process works. Increasing your financial knowledge base is a starting point, and you should never assume that the price of an investment always goes up in price. All goods and services have the ability to go down in price, especially after a great run has occurred. Right now the Stock Market has hit its low also, so what type of strategy is in play with your 401k plan?
McKay, C. (1841). Extraordinary Popular Delusions and the Madness of Crowds. Unknown: Unknown.
Mises, L. v. (1998). Human Action. Auburn : Ludwig von Mises Institute.
Sayre, H. (2011). The Humanities: Culture, Continuity and Change Volume 2. Upper Saddle River, NJ: Prentice Hall.
Wikipedia. (2011). Tulipmania. Retrieved from http://en.wikipedia.org/wiki/Tulip_mania
Conspiracy of the Rich
The 8 New Rules of Money
by Robert Kiyosaki
Online Exclusive Update - #10
November 9, 2009
401(k)’s Are For Dummies
The November 1, 2009 edition of the New York Times states, “To certain experts, 401(k)’s might not be ideal, but they’re all some investors have.”
Personally, I believe people want to be smarter with their money. No one likes losing money. The problem is that our government-controlled education system does not allow much financial education. So, instead of people being smarter with their money, they’re blindly investing in 401(k)’s – and losing financially. Plainly said, 401(k)’s are for dummies.
1974: The Rules Were Changed.
In Conspiracy of the Rich, I wrote that in 1974 the US government began the 401(k) plan and paved the way for our retirement plans to become one more way for the rich to get their hands into our pockets.
Prior to 1974, most employees had company- or government-sponsored retirement plans. In other words, if you were a good employee, you would receive a paycheck for life, even after your working days were over.
Today, in 2009, companies that maintain those types of retirement plans are dying. Companies such as General Motors and the Federal government cannot afford to pay workers a paycheck for life. To reduce the company’s expenses, employees were told a 401(K) was a great way to save for their retirement.
The problem was that in 1974, even through the rules of employment had changed, the school system did not change. Rather than teach students about money and investments, the schools to this day bring in the very agents of the rich, the financial planners and bankers, the very people that profit from financial ignorance, to teach our children about money.
A Whole New Business is Born
After 1974, big business and the government pushed millions of workers into the 401(k) plan, and a whole new profession was born – financial planners. When the 401(k) plan arrived, many insurance salespeople changed their title to financial planner. Even back then it was hard to get a sales appointment if you called and said, “I want to sell you life insurance.” This new title of financial planner was more accepted, sounding more dignified and important, and hence, making it easier to get a foot in the door. I know this because back in 1974 I was out of the Marine Corps and looking for a job that would teach me the art of selling. I remember an insurance company recruiter telling me, “Don’t worry about being called an insurance salesman. We’re changing the title to financial planner. You’ll still sell insurance because that is where you make most of your money. But you will get in the door by saying you are a financial planner.” Today, millions of people have left their jobs to join the ranks of financial planners, preying upon people hoping to have some sense of financial security once their working days are over.
The October 2009 issue of TIME magazine quoted a former human-resources executive as saying the 401(k) is, “The biggest scam ever put on the American people.” I agree. I am afraid that for millions of people the 401(k) will not provide the security they desperately need. For millions of people, all over the world, these investment plans for the financial naïve will prove to be one of the biggest financial scams ever perpetrated upon innocent people. In 2002, I published Rich Dad’s Prophecy: Why the Biggest Stock Market Crash in History is Still Coming…And How You Can Prepare Yourself and Profit from It! As expected, the book was trashed by the Wall Street Journal, Money Magazine, and Smart Money. Now it seems the press is beginning to agree with my 2002 book.
But here’s the problem: if my predictions are correct, the biggest stock market crash in history is still coming.
The Last Depression
During the last depression, only a few people were dependent upon the stock market for security. Back then most people did not invest in stocks. Those that did often invested on margin, meaning they used borrowed money. This borrowing on margin caused a large financial bubble, and when the bubble burst, the depression began.
Yet, that crash did not really affect as many people as you’d think. In the 1930s, many still lived on farms, which meant they could survive even if the stock markets were down. Also, during the last depression the US dollar was still backed by gold, which meant it had some intrinsic value. Savers could safely save money. During the last depression, there were no credit cards. Since debt was hard to get, most homes were paid for.
As stated in Conspiracy of the Rich, World War II and the Korean War conveniently broke out, and the Great Depression was officially over by 1954, twenty-five years after it started. (In 1929, the Dow hit a high of 381 and then proceeded to crash. It took till 1954 for the stock market to once again hit 381).
The Great Recession
Once the depression was over, the conspiracy changed the rules. In 1971, Nixon took the US and the world off the gold standard, and America was on its way to becoming the biggest counterfeiter in world history. In 1974, the 401(k) system began, forcing many people who did not trust the stock market to depend on it for their retirement.
Today, our leaders are doing anything possible to stop this recession from growing into a depression. They are printing trillions of counterfeit dollars. This new recession, caused by the 1971 and 1974 rule changes, is wiping out jobs, destroying home values, and erasing the savings in bank accounts and 401(k)’s for millions. Millions of lives are being financially destroyed due to financial ignorance. In spite of the losses, our leaders continue to say, “Save more money,” even though our money is now counterfeit money. And they are also saying, “Invest for the long term in your 401(k),” even though the 401(k) has lost money for the past ten years.
On top of this, the US goes ever deeper into debt, making trillions in future financial promises that everyone knows we cannot afford to keep.
This is a Great Time
My message is simply this: “This is a great time to get rich.” But don’t listen to insurance salespeople masquerading as financial planners, selling you the wonders of the 401(k). The 401(k) was designed for people who know nothing about investing, which is why the New York Times says, “401(k)’s might not be ideal, but they’re all some investors have.”
The reason the 401(k) is all most investors have is because our school system is failing us. Without an honest financial education, a 401(k) is all most people know. Even today, after the failure of the 401(k) is evident, our school system continues to invite financial planners and bankers into the classroom under the guise of financial education. This is not honest. This is deceptive. This is self-serving. This is the conspiracy in action in our schools.
If a 401(k) investor had invested in gold or oil in 2000, they would be in great shape today. You do not need a financial planner to invest in gold or oil. Indeed, they won’t even sell you those gold or oil. The reason financial planners don’t recommend tangible assets like gold or oil is because the 401(k) does not allow them to sell hard commodities. In other words, why recommend something if the sales person doesn’t make a commission?
If a person had invested in gold rather than the stock market in 2000, they would be up 400 percent instead of down nearly 30 percent.
But in the end, the 401(k) is not the problem. A lack of financial education is the problem.
The Greatest Transfer of Wealth
The greatest transfer of wealth in history is on right now. Many people who use to be rich will soon be poor. And those that have invested in their financial education will become richer.
Now is a great time to invest in your own financial education. It is time to find out what is best for you – not what is best for your financial planner’s commission. The economy will be down for at least two or three more years – if we do not go into a depression or hyperinflation.
Wealth is currently transferring from the financially naïve to the financially smart.
Remember, your brain is your greatest asset. Protect it. It is up to you to decide what goes in it. Your brain does not belong to President Obama, the school system, Wall Street, the banks, financial planners, real estate agents, your boss, or even people like me. It is up to you to decide what is best for you, your family, and your future. Thank you for supporting Conspiracy of the Rich: The 8 New Rules of Money. Keep learning. Pay attention to what is going on, even if you have no money. Remember, Knowledge is the new money.
© 2010 Robert T. Kiyosaki. All rights reserved. No publication or use without the prior written permission.
Friday, August 19, 2011
Taking responsibility. It sounds easy, but it is not. It requires critical thinking. It requires honesty, and it requires a level of maturity. It is simpler to blame someone else for your current plight, but it takes a real man to stand up and accept the challenge to change.
Friday, August 12, 2011
October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February. ~Mark Twain
It is amazing how folks still subscribe to the notion that one must invest to save versus save to invest. Investing in the market is fine and acceptable, but financial education is paramount. Why not place your retirement funds into something that is much more solid and secure? Why are people subjecting their life savings to the ebbs and flows of the market without a loss mitigation strategy?
Top Rated Life Insurance companies have cash reserves, and then they invest those policy premiums into other investments. They are audited on a regular basis, and must show the pay claims based on the regulations of the various States. These top carriers are successful in managing their portfolios but the financial experts advise us to do the opposite of what these successful Life carriers have done for Decades--maybe for some carriers over a century. The consistent theme by these experts is to invest to save and the life insurance companies do the opposite. No wonder people are confused.
With the current stock market volatility, many smaller investors are losing their shirts, shorts, underwear, bras, socks, and whatever undergarments to the equities market. I repeat: There is nothing wrong with investing into the stock market; it is functioning as expected. The issue is still with the investor and his financial IQ.
Saving is a slower process, but you must have some cash reserves to deal with the ups and downs of the market. Cash reserves can cushion the down turns, and cash can be used to jump on asset sales that frequently happen in those down turns of the economy. Nothing continues to go up in price; all things have an elastic attribute to it.
So while everyone is on hot commodities, stock or bond tip, just remember the lemmings follow the crowd. Model what works. Review the financial statement of a top rated Life Insurance Company. They should know how to invest better than anyone; they are paid to manage risk.
P.S. Here is a 28 min teleconference call about how to handle the recent changes in the Stock Market.
Thursday, August 11, 2011
Ok I have more than one quote for the week. Guilty as charged. I will change it to quote of the day or "important quote". This quote spawned this short note to my reader.
"People are beginning to realize that the apparatus of government is costly. But what they do not know is that the burden falls inevitably on them."~Frederic Bastiat
That burden typically falls on the citizens viz a viz taxation. What is your plan to mitigate this large expense?
Most people think just a job and a 401k plan with the strategy of dollar cost averaging is going to be enough. As baby boomers are approaching retirement age, we are seeing a world in great flux. The vicissitudes of the market are impacting the retirement dreams of many Americans. Do you have a plan "B"? Is your plan "A" sound and does it provide risk management strategies? Or is it based on the whims of the political changes and volatility of the market? These questions must be asked and a proper plan must be in place today to deal with this issues.
Wednesday, July 27, 2011
"All courses of action are risky, so prudence is not in avoiding danger (it's impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer." ~Niccolo Machiavelli
Wednesday, July 20, 2011
Tuesday, July 5, 2011
Monday, June 27, 2011
Wednesday, June 15, 2011
Saturday, June 4, 2011
The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education."~Adam Smith "The Wealth of Nations" Book I, Chapter II, pg.17, 1776
Friday, June 3, 2011
Every Investment is a form of speculation"~Ludwig Von Mises, "Human Action"
After reading CNN Money.com's article titled, Index annuities are a safety trap, several questions are brought up in reference to the "traps" of Index Annuities. Of course, this article grossly misrepresents annuities. However the purpose of this blog article is to explore some of the basic functions of annuities. This article will explore if the Index Annuity is an Evil Villain or Tragic Hero. At the end of the exploration, then you can determine if the Index Annuity is an Evil Villain or Tragic Hero. There are various forms of annuities; I will limit our discussion only to Indexed/Fixed Annuities.
What are Annuities?
Annuities are insurance contracts. They are not just any ordinary insurance contracts. They have some unique features unlike the average financial instrument or investment. From an economics perspective, this uniqueness comes with a cost, but in many cases is worth it for the right client.
Annuities allow the owner to place money inside the insurance "contract" during the accumulation period. During the accumulation period, the money can grow tax deferred. The unique feature with an annuity is this: At the payout phase, the insurance company provides a lifetime of income. You can NOT outlive an annuity. There are various pay out options to the annuitant. This is guaranteed in writing by the insurance company. How is the insurance company able pay out a life time of income to a client? Answer: Reverse Underwriting.
As established in the prior paragraph, the Insurance Company pays out for the entire life of the annuitant. It calculates the life span of the annuitant based on the Law of Averages and the Law of Large numbers of millions of similar annuitants. This is an estimate simply based also on the age and gender of the annuitant. Large amounts of statistical data are compiled in order to provide this benefit. Since the actuaries do not work for free, this "cost" is factored into the fees, surrender charges, etc of the annuity.
How does the accumulated capital grow?
The insurance company invests the capital from the aggregate pool of annuitants, and invests the money very prudently. Its not invested in the behalf OF the annuitants, but the annuitants benefit from the success of the Insurance company's investments. With an index annuity, the insurance company will invest those funds into the performance of an external index:i.e S&P 500. Based on the performance the annuitant the insurance company is able to place in writing that the annuitant will NEVER lose money on the account. The capital is safe from downside risk.
Ok no downside risk! What is the catch?
The annuitant is able to always maintain their principle, but has a cap on the ROI(return on investment) on the capital IF the index does extremely well. Those caps may top out at approximately 5%-7%. Keep in mind, if the index goes down, the insurance company will NOT reduce the principle relative to the negative direction of the index. The principle is safe and secure, future gains are locked in; AND this guarantee is placed in writing by the insurance company.
Surrender Charges: Are they a scam?
Most annuities have surrender charges. They are disclosed in the application and paperwork. Question: Why do annuities have surrender charges? Is it to "rip" the customer off? Let us never forget the obvious and salient point about Annuities: Annuities are insurance contracts. Insurance is based on pooled risk. Pooling a risk comes at tremendous cost--so does guaranteeing a lifetime of income. With Index Annuities, guaranteeing that the annuitant will NEVER lose money comes with an additional cost.
Let's suppose that the Insurance Company charges no surrender fees on these types of contracts. The client withdrawal turnover of capital will be high, simply because there are no fees discouraging the annuitant to seek long term growth in the contract. This high turnover of capital would inhibit the insurance company to maintain the satisfactory amount of leverage of capital to properly run annuities. They would not be allowed to provide all the wonderful benefits that an annuity offers: A Guaranteed Life time income and with indexed annuities a guarantee of NEVER losing the capital to the vicissitudes of the market.
Side note with regards to managing risk: Any time the risk is transferred, it is always done with a cost. In the case of Index Annuities, the Insurance Company is retaining the risk that is transferred from the owner/annuitant. With auto insurance, if your deductible is a $100 for physical damages done to the car, the cost will be higher as compared if the deductible was $500. With Index Annuities, the concept is very similar. The surrender charges are the explicit costs for the Insurance Company guaranteeing no loss of principle--and they are transferred to all the annuity policy holders.
Answering the Critics on Index Annuities
Here are some typical categorical complaints about Index Annuities
High Surrender Charges
As discussed in the prior section, Surrender Charges are the explicit cost of the insurance company managing the risk--this risk is the guarantee against the loss of principle, but allowing upside growth. Critics complain about the surrender charges, but do not take into consideration the life time benefits. Remember, one cannot outlive an annuity.
If a client is seeking to have an investment vehicle that matches all the benefits of an annuity, it would take a large amount of time to successfully create, manage, and run this copy. Why not transfer that expertise to someone who has an absolute advantage as compared to doing it all solo?
For people that want a higher ROI and lower or no surrender charges, maybe should consider Mutual Funds. However, Mutual funds do not provide all the benefits and guarantees that Index Annuities provide. Keep in mind, the majority of the risk is being retained by the insurance company, not the owner of the annuity. Mutual Funds, the owners have all the costs and risks associated with this product.
Agents make Larger Commissions when selling Annuities
This excuse is a puzzling and it leads to confusion. It is positioned that somehow that the rationalizing of the fees or surrender charges are to "pay the agent's" Commission. It is a fantastic story that is 100% utter non-sense and drivel. Earlier it has been established that surrender fees are part of explicit costs of running an annuity program. The costs are to protect the asset: The capital inside the annuity and the entire risk pool of the annuity program. Next, the commission is paid separately to the agent for the sale of annuity contracts. Commissions may range from 5%-10% on the annuity based on the company.
Low top end returns as compared to Mutual Funds or other investments
Index annuities allow the owner to participate indirectly into an index. The annuitant has that principle locked in for future gains! The guarantee by the insurance company gives out an additional trade off: a lower cap on top end gains. Typically that is around 7%-8%. I wonder how many individuals were concerned about the earnings as compared to being concerned about how to get their money back from substantial losses in the Stock Market! As Will Rogers stated, "Most people are more concerned of the return OF their money rather than ON their money"
More regulation of Index Annuities
The Financial Services industry is one of the most regulated industries in the Free Market. Contracts, disclosure forms, applications, etc are currently presented to the customer. The customer has a free look period with these contracts. And, the insurance company provides a written guarantee that they will pay a certain percentage on the annuity owner's accumulated balance REGARDLESS of the direction of the index!
The problem with most horror stories with annuities is about suitability-- People wanting to access their cash in less than 3 years. An index annuity is not the best fit for this situation. This problem is a communication problem with the client and the adviser.
In closing, is the Annuity a nefarious "villain" or a tragic hero misrepresented? It all depends on suitability. Most people are seeking the perfect investment. They listen to the radio pitchmen, read the national finance magazines advising them on the "best or perfect investment". The perfect investment does not exist. The most efficient investment does. That investment is based on what is best for your situation, goals and objectives.
Saturday, May 28, 2011
Saturday, May 21, 2011
As we go into this analysis, here are some Economic Axioms to consider:
1. All of us are seeking to pay the lowest price possible for the product or service.
2.Companies are seeking to sell their service at the highest price possible.
After further analysis of these two axioms, something has to give. Companies must compete for the prospects' business against other competitors, but maintain proper profitability to stay competitive in the marketplace. This leads to this question: How are Insurance Companies able to provide and advertise for low rates? Is it a scam? Before we entertain this "scam" or "rip off" rhetoric, let us explore how auto insurance is priced and underwritten. Let's also see how profiling can save money for certain drivers.
How does Auto Insurance work?
Auto Insurance like all insurance contracts is based on several principles: Law of Large Numbers and the Law of Averages. Insurance companies compile a large amount of drivers in a certain market, and analyze certain characteristics to use in the calculation of the cost of premium: e.g. driving record, mode of living, insurance score(credit), Type of vehicle, Age of drivers, Garaging Address, admin costs, loss ratios, Fire District, and other factors. Of course some variables have a higher "weighting" in the calculation of the premium. When a prospective customer is placed into the risk pool, his/her auto premium is based on all those factors. The better the driver, his/her rates will reflect this, and so forth with the other factors. Some factors count more into the pricing than others.
What is a risk class or Rate Pool?
The risk class or rate pool consists of thousands or millions of drivers in a particular market that is insured by the insurance company. The process is this: as drivers are entered into the pool, the risk from the drivers in that marketplace is shared amongst the drivers. The drivers pay premiums, which may vary based on some of the factors of calculation of the premium. There are administration costs associated with this insurance program. Cost to maintain the policy regulation, billing, accounting, etc. Also, there is a cost to administer claims. Of course the insurance company maintains cash reserves to insure financial stability. The insurance company also invests some of these reserves into secure investments.
What really happens if a Claim occurs?
If insured drivers have accidents, resources from the risk pool are re-allocated to cover the cost of this claim: Claim adjusters must spend more time on this claim rather than on other duties, increased customer service contact is required for more inquires about the claim, Special investigation unit may have more time being allocated for a claim to investigate possible fraud, accounting must process checks, legal council must review and ensure claims process is done properly, and of course the individuals in the claim must be compensated. If this happens to an unsatisfactory financial level on an annual basis(this level is relative to each company), then the insurance company will look at the prospect of increasing premiums. The increase may be not equally be distributed within the same rate pool.
That is unfair! I have not had a ticket or accident in 10+ years!
That is the trade off for transferring the risk to an insurance company. If you are "self insured" you can control the rates! But, most folks are not in a position to be "self insured". How does one deal with paying higher rates, but they have an excellent driving record? Profiling...
Profiling can save you money!
Insurance companies are in a competitive marketplace. Their job is to retain as many customers as possible so they can receive premium(revenue) to stay in business. But, if their rates are increasing, its obvious that attrition of the customers will happen. What do the insurance companies do to prevent this? Profiling is the key.
Here is the underlying assumption: If the Insurance company can pool in insureds that have similar characteristics, then the rates will reflect the characteristics of the group. If the insurance company has a risk pool of excellent drivers, then the rates for that risk pool will be lower than the rates of than a rate pool with sub standard drivers. Another note: since this is a preferred risk pool, the odds are that the amount of claims will be lower. Why? The risk pool has excellent drivers.
The set up
Insurance companies will "profile" by segmenting the risk pools. This allows the safer drivers that share similar characteristics to be in a certain rate pool(rate segment) and the sub standard drivers in another. This is a strong attempt to reward excellent driving. Rate increases will still happen in both segments, but if the safer pool of drivers are segmented, the rate increases based on poor driving will be mitigated do to the characteristics of the over all risk pool. Keep in mind, this action benefits the customer, and the insurance company. Their retention figures for customers increase simply because they are making an effort to profile for safe drivers and discriminate against sub standard drivers in the preferred rate segment.
How can I save money knowing this info?
The first step is to contact your local Insurance Agent, and discuss an annual review. Make sure that all he available discounts are available. In that review, see if you are eligible for preferred rates. This may help you be placed in a preferred rate segment, thus providing greater savings.
In summary, profiling CAN save you money. If your driving record fits the profile that the insurance company sets for their standards in their preferred risk pool, it can save you money! Segmenting the risks benefit the customer and the insurance company. Meet with your local agent, and asked to be profiled!
Thursday, April 7, 2011
Use Gift-Leaseback on your parent's home. Say your parents are living in their home mortgage free! They are not getting many deductions and probably don't have enough deductions to itemize with just their property taxes. Moreover, they can't deduct their insurance on their home, repairs etc. Here is a genius solution for all my friends reading this post that will work for everyone.
Use the Gift-Leaseback technique. First, get a fair appraisal of the parent's home. Second, buy the home at that appraised price. Third, lease the home back to them at fair rental value, although courts do allow a 20% discount from fair rent because your parents will make a good trustworthy tenant.
You might be asking, "Where can I get the cash to buy my parent's home?" The answer is that your parent's can be your bank. They can fund 80-90% of the purchase price with a note. There is a minimum interest that must be charged too as noted by the applicable long-term federal rate that you can get on the IRS's web site. As of this posting it is 4.25%.
Thus, each month, you will get a rent check. You will in turn pay your parent's note. Thus, the cash flow will be fairly even give or take about $100-$200 a month. However, there are major benefits to everyone. Your parents can still live in the house relatively cost free since they are getting mortgage payments. The house is out of the estate upon their death.
You and whoever else owns the house now becomes a landlord. This means that you can depreciate the house, deduct repairs, insurance, upkeep costs etc. Moreover, and this is the very cool benefit, you ( and your siblings who own the home) can potentially visit your parents once a year and deduct the trip as a care-taking trip even if it is done at year end. This can be a big deal folks.
Mr. Kevin Walls is the President/CEO of Intelligent Expansion Group, LLC. This marketing organization is
Definition of REVELATION
The speaker went on to describe the power of the human brain. It would take the Empire State Building full of computers at max capacity to come near the mental capacity of ONE HUMAN BRAIN! Since that type of operation is very massive, it would require a cooling system. What is needed to cool this operation? Answer: The water that flows through the entire Mississippi River daily would be needed just to cool of this massive computer system. One Human Brain! Amazing!!
Tuesday, March 15, 2011
"Become Debt Free! Pay off your home, then you don't need the insurance! Once your home is paid off and kids are grown, you don't need more life insurance! Stop paying all that additional insurance, its a rip off! You can save on the cost of insurance and invest in the Stock Market. You will grow your paper assets to the point where you are self insured at my good growth mutual funds that have averaged 12%." ~ The Average Financial Adviser Expert
All of these concepts mentioned in this quote are given out by prominent Financial Advisers and TV Finance Gurus. They may not express these concepts verbatim or exactly in this fashion, but this is the underlying theme of this flawed philosophy. In my opinion, this type of thinking is like betting on horse racing without understanding the details of equines in the race. And, it is very risky. Let's look into this sophistry in more detail.
Self Insurance in Action with a major Catastrophe
Let's suppose you have a home that is worth $300,000. The mortgage is paid off, and you are DEBT FREE! You have accumulated in your 401k type plan $1,000,000. You take off your homeowner's insurance since you have enough assets to be "self-insured". A violent tornado hits your local town, and destroys your home, many local homes, buildings, and etc. Your home and all of its contents are totally destroyed. Nothing is left. What happens?
For starters you are out of a home. Your home needs to be rebuilt. How much will it cost to rebuild? The preliminary estimate to rebuild your home may cost $300,000. In this scenario, it may cost more than that! Why? If the tornado hits the local town, chances are that other homes are impacted. Since there will be a higher demand for labor and materials; the replacement cost of the home just went up! Ironically everyone is not a Contractor, so the value, demand, and the rate of this service has increased exponentially. Just think how that will impact your $1,000,000 if you are "self insured".
The contractors prices have risen, and same with the cost of materials. Materials that were destroyed from the Tornado, now must be transported into your town from another town. Prices of materials are now scarce, causing an increase in price.
Lets not forget the home had other items, food, appliances, personal belongings, etc. All these items need to be replaced. Since there are not an unlimited supply of refrigerators, TVs etc, that either requires a wait for your type of appliance, or deal with a sharp an increase in the price of the appliances.
While your home is being rebuilt, you need a place to stay. If there are hotel rooms available, they also are scarce, causing the ADR(average daily rate) and Occupancy Percentages for the local hotels to increase in price. Please do not forget, other people are seeking shelter while their home is being rebuilt; just like your family. This factor must be deducted from the $1,000,000 cash balance.
This may be a worst case example, but ask the folks during major storms if these things did not happen. Most homeowner policy holders quibble about the replacement cost, but never stop and analyze the complete economics of the situation in a major catastrophe.
This is why a comprehensive homeowner's policy is very important. Insurance provides the leverage to protect a valuable asset for little cost relative to the value of the investment or asset. In this horrible case, the most of the retirement cash monies would have been protected from the tornado. The majority the risk was transferred to the insurance company for a fraction of the net worth of the insured. The insured would keep the $1,000,000 cash in the 401k, plus the insurance company would cover the expenses related to the replacement cost of the home. The insured would also receive $300,000 from the insurance company to replace the home. The only cost incurred by the insured in this scenario if he had Homeowner's Insurance, would be payment for the deductible.
Your 401k plan being "Self Insured at Retirement"
Our previous example shows how having a proper Risk Management strategy can protect several assets in one catastrophic event, how about your hard earned cash retirement savings? Is it protected if you are "Self insured"? Let's take a scenario to show how being "self insured" at retirement is equally insane as the prior example.
You are 65, and your 20-30 year low cost, cheap term insurance policy has expired. You could choose to keep it in force, but the premiums are now annually approximately in the four figures. They also are projected to renew annually, so you opt out of the renewal. You are also told not to ever purchase permanent life insurance simply because it is a rip off. You have $1,000,000 saved in your 401k plan, no need for insurance, right? Your home is paid off, and according to your experts you are "self insured".
Here are some things to consider that are potential catastrophic "Risks":
1. Taxes- As the $1,000,000 is withdrawn, it will be taxed as earned income. Depending on how much is withdrawn annually, this money will be taxed on the current Earned income tax schedule. Of course, the home is paid off, so no interest deduction is used. In case of an early death by the 401k account owner, the IRS will want this money to counted towards the Estate Tax. If the money is still inside a 401k plan, the beneficiaries will need to ensure that that money is rolled into a qualified plan. If it is not, it will be taxed again.
2.Health Concerns-One of the fast growing segments of our population are people living to be age 100. But, there are obvious health concerns that are more common with the elderly population than the younger population. Let's hope that $1,000,000 can fill in the gap for those needs. If those needs are not met, then the need for Long Term Care, Pharmacy visits, Occupational Therapy, Physical Therapy, or other rising health care needs can not easily ignored if you are "self insured".
3.Day-to-Day Expenses-People worked their entire lives to enjoy retirement. What will be the quality of life? How long will that money last? Will you outlive your retirement savings? Cost of food, gas, other goods and services change with are Fed monetary policy and Government Spending. What will be the cost of gas? These things impact your wallet.
4.Safety of Principle-Based on the external factors of inflation, interest rates changes, stock market, bond market, and other external financial vicissitudes, will your hard earned retirement savings be surreptitiously eroded do to these factors? If so, how can you mitigate these risk?
5-Baby Boomers-This age segment of the represents approximately 28% of the total population. Like in our prior example of the home lost to the tornado and the scarcity of labor, materials, etc impacted the cost of rebuilding of the home, this variable is very similar. This age segment will make all the resources needed for this age segment more scarce, the net effect will be an increase on the price of services and goods specific to the needs of retirees and other age groups.
Based on these factors, and other that have been overlooked; having just cash in the bank at 65 may not be enough. All these concerns must be considered, simply scoffing or providing overly simplistic solutions to them is a sign of prodigality.
"But Robert you have scared me now!"
Taking control of your financial future is the first step. Becoming more familiar with the world of investing, insurance, etc is a way of mitigating these risks. Another way is transferring this possible risks to an insurance company, advisory firm, etc. These entities are experts in management of risks and assets.
The current popular belief that one product or one plan is the silver bullet for every situation. Unfortunately, this is not the case. The other myth, is that one product is cheaper or better than other products. This is also not the case. Each product exists to serve a purpose. If no one needed that product, it would not exits. It is your job to fit the correct product into your goals and plans.
In closing, simply being "Self-Insured" for retirement is equally as foolish as the person that removes his hazard insurance policy from his home. Here is a closing thought: In light of the recent events in Japan, what would happen if many of the major industries were "self insured"? People that lost 40-50% in the stock market are wishing that they where not self insured on the roller coaster ride over the last 3 years. Having a proper risk management strategy is equally important for your cash savings as for your other fixed assets.