Everyone who wants the world to continue to move forward without a glitch has been denying this for months but anyone who has shopped for groceries or filled up their car with gas lately knows that things are costing more. That in itself is not enough to signal a recession but for most of us there have not been any proportionate income increases to go along with these increased cost and for us this spells trouble.
Will things get worse before they get better? No one knows for sure, but when I read things like the article I found in Barron’s last week I tend to think that they just might get worse before they get better. The title is enough to shake you in your boots, “Yes, That’s $2 Trillion of Debt Related Losses”. It is an interview with Nouriel Roubini, an economist who has been predicting for two years most of the problems we are now experiencing. Here is some of what he said in the interview.
Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?
“We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.”
So far, we have seen no recession in the technical sense: two consecutive quarters of negative growth in real GDP. Why not?
“Maybe the recession started in January; if you look at the data on gross domestic product on a monthly basis between February and April, GDP was falling. Saying this is not a recession is just a joke.”
How long will it take for the collapse in the banking sector to play out?
“It is happening in real time. Many smaller banks are going bust already. More than 200 subprime-mortgage lenders have gone bust in the past year alone. And many community banks will go bankrupt. Community banks usually finance everything: the homes, the stores, the downtown, the commercial real estate, the shopping center. If you are in a town or a municipality where there is a housing bust, the bank is gone. Of three dozen or so medium-sized regional banks, a good third are in distress. That includes the Wachovias and Washington Mutuals of the world. Half of this group might go bankrupt. Even some of the majors could end up technically insolvent, though they might be deemed too big to fail.”
My purpose is not to make you feel worse than you already do but to get you thinking about what you can do to stay ahead of all this. First, you should have some money in the bank (one that won’t fail, I hope). Having cash during a downturn can help you weather your own personal downturn and take advantage of opportunities that are sure to be there at the bottom.
Next, you should find new ways to conserve the resources you have. I have a garden and I freeze, can and dehydrate tomatoes, peppers, beans, squash and cucumbers to see me through the winter. You can find ways to drive less or drive using less gas. Start buying store brands instead of name brand products (most of the store brands are made by the national brands anyway).
Lastly, you can find new sources of income. How much stuff do you have in that storage room or in the attic? Have a garage sale of put it on Craig’s List or EBay. Start a side business doing something you already know and like to do. Can you play an instrument? Give lessons. Are you a computer geek? Sell your skills to help people who need it. Are you a great cook? Find someone who wants to eat what you make. There are lots of ways to stay ahead if you just put your mind to it.
A recession doesn’t have to hurt a lot if you just stay ahead of it by being prepared and by taking action. Now is not the time to pull the covers over your head. Get up and start moving and you will be one of the survivors.
Let me know if I can help you in any way.
Marc
Are you interested in helping people succeed? Do you understand the concept of Pay it Forward?
There is a group of people who want to help you pay it forward to just 4 people and help end poverty in this country and around the world.
Life is full of ups and downs and often we are judged by how we get through each of them. We are entering a time when you might be faced with your own struggles created by a lost job, high gas and food prices or some personal tragedy. Will you get through them to reach the next high or will you succumb to the feelings of defeat?
I ran across this little video today that is based on a poem written many years ago that puts life’s race into wonderful perspective. It says it all better than I ever could and I hope you appreciate its message.
Remember to keep getting up no matter what, for you can’t win if you don’t finish.
Marc
Are you Planning a cruise this year? Here are some great tips to help you pack right.
It seems like only a few short years ago no one was worried about retirement. The stock market was roaring, home prices were rising and the economy was in solid shape. Everything looked rosy and many people were planning for an early retirement or at least one that carried no risk.
What is a baby boomer to do? We have been stashing money away as fast as we can into our homes and retirement plans, hoping for the market to drive prices ever upward only to find that what goes up does indeed come down. We are now faced with the prospect of working longer, saving even more and hoping that things turn around quickly.
We could just get depressed, resort to substance abuse or consider an early death but those options don’t seem all that appealing either. Perhaps the answer to our problems is a new President, one who promises change or a better life? That might indeed be the answer but I doubt it. Very few individuals can fix what is a fundamental flaw in a very complex system.
The biggest problems you will face in retirement are:
How long you live?
What your tax bracket will be?
How well your portfolio performs?
What government benefits will look like?
Under “how long you will live” falls one other factor that will affect everything else; how healthy will you be? Fidelity investments recently completed a study that projected that the average couple will need about $225,000 in retirement just to cover non-covered medical expenses. This could put a real crimp on a couple’s lifestyle. Also, longer life means your money must last as long as you do, so, your returns better be predictable.
What about your tax bracket? If you have all of your retirement savings in tax-deferred savings plans (IRAs, 401ks and annuities) you might be in for a real shock when it comes time to pull these dollars out. If you were counting on being in a lower tax bracket in retirement you may find that every 1% uptick in taxes will begin to eat away at the pool of dollars you have saved.
And what about your investment returns? Most projections of your assets lasting until the end of your life are based on returns of at least 5-6% per year, assuming you only withdraw 4% or less. If you experience returns of less than 5%, even negative returns, your assets will be expended much sooner than you expect. Can you predict with certainty that the market will perform the way you need it to once you get to retirement?
Government benefits are even a greater risk. The last article listed above gives you some of the stark statistics. Medicare will consume over half of all tax revenue by 2042, Medicaid is already dipping into its trust fund and Social Security will be out of money by 2041. All of this means your benefits will be reduced, you will have to wait longer and taxes will need to go up in order to prolong these programs.
Is there hope? Sure, but you will need to take action to make it happen. Now is the time to begin creating tax-free income sources that you can use in retirement. You also need to look for ways to guarantee your returns or find products that have more predictable returns. This doesn’t mean that you have to give up on market based returns though, as there are several products that can meet these criteria.
I don’t have the space here to get specific but I would be happy to speak with you directly if you would like to explore these for yourself. The important thing for you to do is educate yourself about what actions will impact your future retirement the most, both negatively and positively. Once you have this knowledge you can find ways to maximize your potential retirement income and protect your assets without giving up choice and control.
If you would like to explore these topics in greater detail I have put together a seminar that you can access via the internet that will explain in greater detail both the problems you face and the potential solutions you can access right now to put yourself in a position where you have choice and control over both your income and your tax bracket.
If you know an insurance agent or financial planner that might be interested in this information to share with their clients please let them know about this website: http:synergia-bp.com
I have been thinking recently about problems; my problems, my wife’s problems and the world’s problems. Of course, when I compare my problems to what other people are living with, I can see that I really don’t have problems. I am also aware that problems are only problems if we define them as such.
That may be hard to comprehend when you are in the midst of a problem, but it can be quite valuable to your coming out of a problem if you could find a way to define it differently.
Recently, I came across a couple of things that really put this in perspective and which I want to share with you, as I feel that they might put your problems into perspective as well.
The first comes from Eckhart Tolle’s book “The New Earth”. I have been listening to it as well as following the discussion that he is currently having with Oprah Winfrey every Monday night. The sessions are available for download from iTunes as well as from her website. In chapter five of his book he shares a story about two ducks that get into a fight and compares their reactions with how they might react if they had human thoughts and feelings. He also shares a story of two Zen monks and how we carry thoughts and feelings with us that hold us back.
I recommend that you take 4 minutes now to listen to him tell the stories.
If we could just flap our wings and release all of the memories that keep us from moving forward, we would live in a much different world.
The second item came in the form of a video that I was sent last week. This is an amazing story of Jill Bolte Taylor. Jill is a brain researcher and scientist who explains her own stroke and what she learned from it. It will leave you moved and hopefully able to put more of your own life into perspective. This file is about 11 minutes long, but once again, I guarantee that you will be moved by what she says.
Life is truly an amazing adventure and I for one want to continue exploring all
that is possible for me and for you. I hope you find a way to stay in your right mind so that we can find a way to create the peace we all desire.
What would our planet be like if we realized that we are all one? The bible speaks of the coming of a New Heaven and a New Earth. But what does that mean? Have you ever wished that you could be a better person, more spiritual, a better listener? Have you ever desired to be more connected to BE more so you could DO more?
I believe that we are on the cusp of a new age. We are seeing the flowering of humanity and much of what this New Earth will bring is already being witnessed by many on this planet. I am sure that you have heard, seen or read “The Secret” and maybe even “What the Bleep“. These are just two recent examples of the flowering of these ideas that are now entering the world in ways that are hard to avoid. The ideas in those and other examples are not new but they are beginning to reach new levels that will surely reach a tipping point in the next few years, a tipping point that will propel the human race into a period of true enlightenment. The basic idea is that we are all connected and that thoughts become things. That the unseen may be more real than the seen and that we can effect change in ways we never dreamed possible.
The next wave leading to this tipping point is now upon us and can be witnessed in two movements that if you haven’t yet heard about them you soon will.
The first is presented in a new book by Eckhart Tolle called “A New Earth“. This book is on Oprah’s book club list and will be highlighted by an online class that she is starting on March 3rd. You can find a link to the class here. In his new book Eckhart takes us on a journey to discover our true selves. A journey that will lead us toward the goal of realization that we are all one and that, without our egoic minds in the way, we can become all that we were meant to be.
The second occurrence began about 6 years ago in India and is now spreading across the planet at a speed that would have been impossible just a few decades ago. This teaching comes from a place called the Oneness University and is spreading across every continent in the world. It is not a new religion or even something new to believe but rather a physical alteration that is taking place in the minds of people it has touched. In India they call it Deeksha in the Western World they call it a Oneness Blessing and there is evidence that it actually alters the brain chemistry in a way that allows people to be present to the oneness that is our birthright. Deeksha can take place in person where the giver places their hands on your head or it can take place energetically over small or large distances, even over thousands of miles. I have been exploring this concept for myself and would recommend that you get these two books and do a little exploration for yourself; Awakening Into Oneness by Arjuna Ardach & Deeksha by Kiara Windrider.
Neither of these books or concepts will conflict with your current belief systems but, instead, should bring you to a deeper understanding of the true teachings of your religious beliefs and a closer walk with your spiritual leader. Both of these movements as well as all of the other energetic actions now taking place all over the planet will only hasten the day when there is a true awakening of mankind and the ushering in of a whole New Earth. I can’t wait!
Peace
Marc
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As we baby boomers approach retirement many of us have started to take a much closer look at what we will need in the form of assets if we are to live to the age of 80 and beyond. Most of us have been very focused on accumulation of assets up to this point and may not have stopped to consider what the future outcomes might look like.
We all have had expectations of what our accounts might look like and some of us have had those expectations dashed by market corrections or other financial setbacks. I think it is time that we took a close look at what other expectations we have for the future versus what reality might spring upon us. If we are to be successful in our own retirements we should move toward it with our eyes wide open and our plans firmly in place.
What follows is a short examination of five areas that each of us should prepare for and a few ideas that might help you improve your chances of success. Some of this might appear to be doomsday like but I think we will all be better off if we prepare for the worst while expecting the best, so let’s dig in.
Expectation #1: The stock market will continue to provide above average returns well into the next decade.
We know that investing in the stock market has produced the best chance of growing our assets at rates that beat inflation and other fixed money instruments over time. If you stay invested you will always get the average market return for the period you are in the market.
One thing we can say for sure about the markets, though, is that they will never go straight up or straight down. We tend to see periods of growth and periods of stagnation. In the short-term no one can predict whether you will make or lose money but we know that over the long term (10 plus years) you will get whatever the markets return.
The danger for us going forward is that when we start taking income from our investments, every negative year will shorten the lifespan of our potential income stream by as much as 5 years or more. If we want to live comfortably to ages of 85 or 90 we will need more predictable returns than those odds will give us.
Are you willing to bet that the markets will perform the way you want them to when you get ready to retire? I don’t think any of us is willing to take that bet and that is why more and more of us are looking for instruments that will guarantee us a minimum return and lifetime income streams with the money we already have accumulated. A little research on your part should yield some good choices for those assets you can’t afford to lose.
Expectation #2: I will be in lower tax bracket when I retire.
I am sure you have been told this by every planner or investment professional you have ever talked to. They all encouraged you to fully fund your IRAs and 401ks because of the current tax deductions and the tax deferred growth with the promise that when you retired you will be in a lower tax bracket. I have conducted seminars for over 5 years now where I ask the question of my audience, “do you think future tax rates will be lower, the same or higher”? I can count on one hand the number of people who said lower or the same. When you look at our country’s current level of debt along with the future liabilities for our major entitlement programs (which we will look at next) I think you too will be hard pressed to think your taxes will even stay the same going forward, let alone reduce.
Whatever your current tax bracket is, can you imagine living on less than you are today? If your income stays the same and your deductions disappear because your kids are gone and your home is paid off, what chance do you have to reduce your tax burden? The reality is that during a 20 year retirement, if you have accumulated all of your retirement assets in tax-deferred accounts, you will pay 10 times more in taxes than you saved in taxes over your lifetime, assuming no tax increase. Every increase in taxes going forward will mean you will need to take more money out of your savings to maintain the same lifestyle.
One way to solve this dilemma is to start funding a private tax-free retirement plan using an insurance product that is linked to a market index and designed to provide maximum cash accumulation with a minimum death benefit. This product is known as equity indexed universal life. Here again, a little research on your part will reveal multiple, high quality companies that currently offer these products.
Expectation # 3: I can count on Medicare and Social Security to be there for me like it was for my parents.
The reality is that both of these programs are in trouble and will only get worse as the 80 million baby boomers enter retirement. Ask anyone under the age of 40 if they think Social Security will be there for them and you will soon see that this reality is already well entrenched in our culture. The facts are that 60% of current retirees say that 50% of their income currently comes from Social Security, 34% say that it is 90% of their income and 22% say that it is 100% of their income.
By one account, it is predicted that by 2019 Medicare will consume 24% of all tax receipts and by 2042 it will consume 51% of all taxes collected.1 If you think universal health care will solve this problem, you must realize that Medicare is a form of universal health care and anything that will replace it will be burdened by the same reality of baby boomers living much longer in retirement than their parents ever did.
As for Social Security, it is predicted that the Social Security trust fund will begin be tapped into in 2018 and be completely depleted by 2044.2 If we had made changes to this program years ago we might have been able to extend it but I don’t see any congress willing to touch this problem until it is too late.
The bottom line is that benefits will need to go down, we will need to wait longer to be eligible and taxes will need to go up to pay for the massive increases in cost that will result from the higher usage figures projected. We are going to have to become responsible for our own retirement planning and should these promised benefits materialize for us we should feel lucky if we can plan an extra night on the town every month.
Expectation #4: I will live to my normal life expectancy.
This might well be true but then you must ask yourself, what is my life expectancy? When Social Security was instituted the average time spent in retirement was 3 years. Many of us today will spend 20 to 30 years in retirement. Statistically speaking, if you are a single male age 65 you have a 50% chance you will live to age 85 and a 25% chance to live to 92. If you are a single female age 65 you have a 50% chance you will live to 88 and 25% you will live to 94. If you are a married couple age 65 one of you has a 50% chance to live to 92 and a 25% to live to 97.
If these numbers don’t get you thinking about how long you will need for your money to last consider this. One of the fastest growing age groups in the United States are those people over the age of 100. There are currently over 27,000 people over 100 and that number is sure to grow as the baby boomers begin to age.
Expectation # 5: I will stay healthy well into my final years.
There is no doubt about it; we are much more conscious of our health and taking care of our bodies and minds than any generation in the history of the world. We are finding new ways to combat disease and to stave off illness as well as to treat conditions that would have killed us only a generation ago. However, all of this has come at a price and that price needs to be calculated into our future income needs.
According to a study by Fidelity Investments, a retired couple without employer-sponsored health insurance can expect to pay $215,000 for out-of-pocket health care costs like premiums and co-pays. Moreover, this number does not include significant costs like long-term care, which isn’t fully covered by Medicare. These numbers also assume you live to your life expectancy and not beyond. Last year these costs rose by 7.5% and we do not know what kind of increases we may see in the years ahead. As we have outlined above, Medicare costs could easily rise by double digits in the next 20 years.
If we add in home health care and long-term care into this equation we can easily double the numbers above and put a further strain on our already over taxed retirement funds. One thing you can do about potential long-term care needs is to purchase a long-term care policy from one of the many experts in this field.
What you can do to prepare
The numbers aren’t pretty but there is no need to despair. Whether you have years to prepare for retirement or you are already there you can create a plan to succeed and prosper in your own retirement. To summarize let’s go over the realities again:
Investment directly into stock market investments can leave you at the mercy of the markets and geopolitical events. You will need to be in investments that can give you predictable returns without the threat of market downturns.
Taxes will probably be going up over the next few years and into your retirement. It would be best to use your tax-deferred retirement plans early in your retirement and it may be prudent to move them to tax-free instruments at your earliest opportunity.
Government entitlement programs will take a larger and larger share of the tax revenue in the future and future benefits may well be reduced or eliminated. Start taking responsibility of your future income needs by using instruments that can give you market based growth in a tax-free environment.
Plan to outlive your own life expectancy. Create plans that will provide income streams you cannot outlive. There are many instruments on the market today that provide living income benefits you cannot outlive and that can be funded with both taxable and tax-deferred assets you now own.
Expect to stay healthy but plan for the probability that you will need to spend more on heath care in the future. Purchase a long-term care policy that will pay for future needs at home and in care facilities.
One thing you can do right now is to get educated and speak with a professional advisor, preferably one who carries the CERTIFIED FINANCIAL PLANNER® designation. The sooner you take action the greater your success will be. Remember, by planning for the worst while expecting the best, you will be the ultimate winner and your retirement years will be all you have dreamed they would be.
Marc Cram is a CERTIFIED FINANCIAL PLANNER in Durham, North Carolina. He works with families to protect and increase their assets using safe liquid investments. Marc holds a free online seminar every Monday evening at 9:00 pm Eastern time and can be contacted through his website at www.cramgroup.com. You can download a free 12 page article on how to safely and conservatively build wealth at www.wealthyyou.us
1 According to Medicare Trustee Thomas R. Saving, a professor of economics at Texas A&M University and senior fellow at the National Center for Policy Analysis.
2 Trustees of the Social Security Trust Fund
My life is always overflowing with blessings but I am more aware of it at this moment than at almost any time of my life. Right now I am blessed most by my garden. It has gone above and beyond this summer. Even with the heat it has proved to be most bountiful. Not only has it looked great all summer it has provided bushels of cucumbers, tomatoes, potatoes, beans and peppers, but the herbs and flowers also came through like champs.
The Flower Side
The Vegetable Side
The results of all that came out is seen in the picture below. Most of this weekend was devoted to canning peppers, tomatoes and salsa along with freezing the grape tomatoes. Most of the fruits of my labor are exhibited below. I probably have at least enough peppers on the vines to duplicate the work I did this weekend. You see, I vowed that I would not run out of hot sauce again this year and I think I’m on schedule to exceed my quota.
I planted Cayenne, Tai chili and kung pao chili, and jalapeno; all very flavorful and very hot. I wanted to experiment so I made some with mango and peach as well as mint and tarragon. I have no idea how they will taste, past the intense capsaisin rush but am excited to sample, after a little aging. I combined all 4 chilis in one batch and then canned each chili hot sauce alone for maximum flavor testing (I canned most of the jalepeno). As you can see I am a little crazy about my hot sauce.
You know, I never got, as a child, why my mom always had a hot pepper on her plate for almost every meal , but as I matured and began to experiment with chili peppers I now put my hot sauce on almost everything I make. I am counting on it extending my life… and if it doesn’t, I shall die happy!
The Little Jars are the Hot Sauce (33 in all)
After all of my labors there is sense of fulfillment, of completion and a deep gratefulness for what a little peice of soil and a few seeds can do. All it took was some preparation, a little water, a little sun, a little tending and a lot of love. I am grateful to my father for giving me the love of gardening and to my mother for my love of cooking. There is a great connection to the earth in each endeavor and I am happy doing each whenever I can.
Amongst all my kitchen work this weekend I had the priviledge of sharing my loves with Sandy’s three high school friends and I think they all had fun. Just another example of the bounty in my life. Thanks girls for allowing me to brighten your time together.
Getting Predictable Returns
You may have noticed the danger signs in the market lately. This is what we all fear as we approach retirement, losses that we don’t have time to make up. If you are in retirement, these losses can shorten your income by years. If you are concerned about protecting what you have as well as taking advantage of market based returns, I have some ideas for you.
Feel free to attend one of my online seminars or call me so we can talk. You don’t have to be at the mercy of the market to succeed.
You have been saving diligently now for many years, looking forward to the day, not too far down the road, when you can retire and begin living off those hard saved dollars. You have done everything the gurus and planners have told you to do. You have used the vehicles they suggested, invested in the products they sold and taken advantage of every tax saving idea you have read about. You were even smart enough to move into cash in March of 2000 (well, maybe not that smart). You are going to be ok though, right? Maybe not!
Regardless if this is you or you have been planning to save for retirement as soon as you get that last bill paid off, it is time for you wake up to the tax problem that nobody mentioned to you until now.
How many times have you heard or been told that you are going to be in a lower tax bracket when you retire? Is that true and do you believe it? If it is true then putting all of that money into those tax-deferred vehicles may still be a good idea, but if it is not true, what are you going to be looking forward to?
Let’s start with some simple logic. First, what sort of income would you like to live on in retirement? My guess is that you would like to keep your standard of living about the same as it is today. What is your current tax bracket and how many deductions do you currently have? Most people have at least a mortgage deduction and if the kids are still at home you get a deduction for them. If you are smart you might even have a home based business that affords a few more deductions. So, you have current income (fully taxed) and current deductions.
What are you hoping or planning will happen before retirement? The kids are gone (and not coming back), the house is paid for and your income is replaced by your investments, right? Great plan but what happens to your taxes if your dream comes true? Every dollar coming in is fully taxed and you have lost every deduction you had. Does that sound like you being in a lower tax bracket?
Now let’s think through a little more of the problem. There are about 80 million baby boomers out there getting ready to join you in retirement. According to the Congressional Budget Office about 50% of them are on track to save enough money but are unlikely to experience the kinds of returns their parents did. In addition, there is no guarantee that the public benefits that were paid to your parents will be there for these future retirees. They are also likely to live at least 2 years longer in retirement than their parents which means that they will need either more assets or better growth of their assets if they want to maintain their lifestyles.
If you got from the last paragraph that there are also 50% who have not saved enough for their retirement then you are starting to get the picture that taxes may well be going up just when we need more money to fund our retirement and that as more and more boomers retire that need will only increase. This, my friend, is the part no one is talking about and this is the dilemma you will need to address for yourself, now, regardless of how close retirement is to you.
Does it make sense to be shoveling extra dollars into those tax-deferred savings plans if you know that just when you need to pull it out it is going to be taxed at rates even higher than today? Do you realize that if you live a normal retirement (from 65 - 85) and tax rates just stayed the same, you will pay 10% more in taxes on the money coming out of these plans as you saved by putting it in those plans? What kind of retirement planning is that?
So, what is a boomer to do? If what I just laid out makes sense to you, then you have only a couple choices in front of you to overcome this problem. First, stop overfunding your 401k plans. Put in whatever amount your company will match but don’t keep compounding your future tax problem by adding more to it. Next you could begin putting more money into your taxable accounts. At least this way you will be paying taxes at current rates and you can hope that congress will leave the capital gains rates alone for your entire retirement.
A better choice is to begin using vehicles that can create tax-free income in retirement. There are several that you should look into. First, you should be funding your Roth IRA if you can. You must be making less than $160,000 per year in joint income to be eligible though. If you can’t fund a Roth you might consider moving some or all of your IRA or 401k money into a Roth in 2010. That year anyone can make this conversion and have 2 years to pay the taxes on the transfer. This will effectively take that money and tax it at today’s tax rates and allow you to continue to grow it and use it tax-free in the future.
The next idea may sound strange but hang with me here as this might just be the real winner. Why not create a private retirement plan using cash value life insurance? If you have never considered this idea let me explain the benefits. First, life insurance, if properly structured, can create a nest egg that can grow tax-free, be accessed tax-free and passed on to your heirs tax-free. There is no limit to how much you can put into it, no requirement to ever take it out and the money is taxed only once, when it goes into the policy.
If we are using this as a cash accumulation vehicle we will want to structure it to be the most efficient it can be. We do that by buying the least amount of protection while putting as much money into the policy as fast as the tax laws will allow us to, without causing it to be classified as a modified endowment contract. A modified endowment contract functions much like an annuity which means that any money we take out will be taxed instead of being tax-free. If it is structured properly and held for 20 years or longer the internal costs are not much more than the average loaded mutual fund, about 1.5 to 2%.
There are also some great benefits to creating this supplemental retirement concept. Unlike your IRA or 401K, there are no restrictions on how or when you use the money inside the contract. You can even use it as your own banking source once it is fully funded. Why borrow money from the bank to purchase your next car or send your kids to college when you can borrow it from yourself, and pay it back to yourself. Your money is fully protected from lawsuits and creditors in most states and the dollars inside the policy never show up on college financial aid forms. And when you are ready to tap into it for retirement income, you can create a tax-free income stream that could be at least 50% greater than what you could create from those tax-deferred accounts.
If this idea makes sense to you, you will want to talk with someone who knows how these policies need to be structured and what type of policy would be the most advantageous for you. Regardless of what you have done in the past to plan for retirement, you should consider the ideas here as a way to overcome the tax problem no one has told you about, and to take control of your own financial future.
Marc Cram is a Certified Financial Planner and has been practicing in Triangle for 20 years. He lives and works in Durham, NC and can be reached through his web site at http://www.cramgroup.com/
There has been much ink spent lately on the problems in the housing market. Talk of people losing their homes because of bad loans, dishonest mortgage lenders and poor planning are rampant in most any paper you pick up today. In fact, much of the blame has been heaped on those exotic mortgage instruments and their misuse. People who are marginal borrowers (what we call the sub-prime market) have often been the subject of these stories and will be the ones most at risk from the changes that have already occurred and those yet to come. Not that these changes are all bad, but as usual those who least can afford it are the ones most affected.
I would like to shed a little light on these issues from my point of view as a Certified Financial Planner™ and someone who helps people use assets, like their home, to build wealth. First, is there abuse of the system out there in the market place? Certainly, but no matter what the regulatory agencies do to solve the problem, there will always be abuse. The real culprit, from my point of view, is our own unwillingness to take responsibility for our actions. If the lenders were more responsible they would do a better job of screening applicants and fitting them with the right mortgage products or even be willing to turn them down if they can’t be confident of repayment. If the borrowers were more responsible they would demand clear explanations of how these products work and what they can expect in subsequent years. They would also be willing to settle for a little less house than stretch themselves to dangerous limits.
Fortunately, we have been lucky here in the Triangle. We have not seen the big run up in values that have occurred in Florida, California or the Northeast. We also live in an area of the country that people are eager to move into and we still have plenty of open space to accommodate them. The issue here is one of degree. We don’t see the abuse that took place in these overheated markets but we still have people selling the same mortgage products with some of the same results.
The product most discussed is called the Option Arm or Pay Option Arm. Don’t get me wrong, this is a great product for the right borrower but it has been used by some to get people into homes that they clearly could not afford using a standard fixed rate loan or even a fixed rate interest-only loan. If you don’t know how these products work, the borrower has the option every month of paying either a 15 or 30 year amortized rate, a current interest-only rate or a minimum payment that usually starts at 2%. Now even though you have all of those choices you can bet that most people are going to choose the one that has the lowest out of pocket cost, the 2% rate.
If the current interest rate is 6% you can see that you are going to be adding to your mortgage every month rather than paying it down. In addition, the payment goes up only 7.5% per year but the interest rate is recalculated every month. If you lack the cash flow and or home values are rising at less than 4% you will begin to get into trouble very quickly, and that is what has happened to some.
Like any complex financial instrument, a mortgage must be managed if it is to be used successfully. This means that you need to forge a relationship with your lender that is deeper than just the “guy who wrote my mortgage”. You might also want to run this by your financial planner so that it is coordinated with your overall financial plan. The lenders that I refer my clients to know their business and are educated on the proper use of the products they sell. Since my advice includes using mortgages to access home equity I have to be confident that my clients will be well served and that their goals will be reached. This should be your goal too regardless if you are using your home as part of your wealth strategy or if you just want to pay it off as soon as possible.
Remember, it is your responsibility to create the discipline and take control of your own financial future. Mortgages are not your business so it is critical that you do your homework up front and ask the hard questions of those people who are advising you. If you have good advisors, get educated up front, and manage your assets in intelligent ways you will reach your goals with greater speed, comfort and safety, and that’s all any of us want.
Marc Cram is a Certified Financial Planner™ and has been practicing in Triangle for 20 years. He lives and works in Durham, NC and can be reached through his web site at www.cramgroup.com
