EIA's - Seeking A Better Idea

Q. Jeff--just found your website from research on Soundmind Investing's website. I had not heard of equity-indexed annuities until I was given a presentation by a financial advisor from our church...your rising interest rates article said you had a better idea??? Thanks.

A. Many EIAs only have a guaranteed minimum of 3% (if that). You can get this on money market accounts now.

As far as alternatives, it depends on if you are needing income or growth, your age, etc. I typically use an array of investments with my clients that include select Exchange-Traded Funds, REITS, Bonds, Closed-End Funds and other High-Yielding securities.

With the ETFs, I utilize a proprietary money management system I developed that is designed to basically give the benefits of EIAs (less market risk and participation in market growth) without set-up fees, time commitments, surrender penalties or commission.

For the income portion of the portfolio, I employ a diversified mix of higher-yielding securites. Most advisors and investors haven't even heard of some of them. The dividends on these can easily range from 6-10%+.

Another example is a REIT that I use that doesn't fluctuate in price and pays a monthly dividend between 6-7.25%.

Through broad diversification in properly selected investments you can retain complete control and access to your money while still getting the risk reduction you are looking for.

Thanks for your question.

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70 with $$$ To Spare

Q. I will be 70 in Sept and have $30,000 available to invest. I don't plan to need the money at this time. What do you suggest? I have just read about the Indexed CD's but can't find out much about them. Is there a bank near me that sell's them? I've been reading your opinion on the Indexed annuities.

A. I'm glad to get your email...

You mention that you don't need the money at this time. How much money do you have in savings or things like Certificates of Deposit?

If you don't have enough to cover all of your living expenses for at least 6 months then this money should just be in a money market account or a short-term CD.

If you do have other money set aside, then the question is what you want this money to do for you?

Realistically, it probably won't change your standard of living if you make a couple more percent in one investment versus another. So you have to judge whether it is worth taking the risk.

From what you said, it doesn't sound like you have a lot of investable assets. Because of your age and these reasons it may be best to not worry about being too aggressive.

If you want an ELCD, it may be hard to find locally. It is probably easiest to call Fidelity Investments. You can open an account there and they should be able to provide the ELCDs. If you get one, stick with ones that are shorter-term--maybe 3 years.

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Is a Variable Annuity Suitable For a Roth IRA?

Q. My wife and I both bought into a #### Variable annuity last year in the form of a Roth IRA. Is this a bad investment? We are both 38 years old. If I need to bail out of this can I do that easily without being penalized? Thank you.

A. I don't see where a variable annuity provides any significant benefit for a Roth IRA...other than to the agent who sold it to you. You would have a much larger investment universe to choose from outside the variable annuity, whereas inside you only have the options they allow you.

Many variable annuities have surrender penalties that last for 7 years. If yours does, then it doesn't make sense to get out and pay the penalty. Instead, put any future contributions into more of a brokerage-type Roth account, for instance at Fidelity, T. Rowe Price, Vanguard, etc.

Thanks for your question!

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Looks Like I'm Hitting A Nerve...

Q. Why don't you stop beating the dead horse about advisors reaping huge commissions for recommending EIAs? Most reputable advisors, such as myself, who work with the utmost of integrity and recommend what is right for the client, don't earn HUGE commissions, as you keep harping on. We earn a respectable commission and use shorter term accounts, say 6-8 years. My professional guess is that the cost to the client may very well be quite a bit less that your on-going annual fee you charge over many years. As you know, the client pays no sales charge for the EIA. Are the EIAs right for everybody, absolutely not. I know I could generate a professional article detailing the pitfalls of a fee- based advisor, just as you continue to do about EIAs. Sure there are unscrupulous "annuity salespeople", but please stop harping this to death! Most of us work with the utmost of integrity and have been in the business for many years.


A. Thank you for your email.

Unfortunately, I must remain true to my convictions and I cannot endorse the use of EIAs in any way. Also, EIAs are now attracting a lot more attention from regulators on a national basis who share the same concerns I do.

"utmost of integrity and recommend what is right for the client"

If an EIA-type vehicle is absolutely what your clients need, then why not recommend an Equity-Linked Certificate of Deposit to them? It will provide the client with all the benefits of an EIA without all the surrender penalties--although you won't earn as much.

This weeks article deals with the issue of commission-based versus fee-based and will address my views on the differences.

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...and there's More!

Q. Do you realize how messed up you are when you talk about annuities? First they are not an investment..... They are a safe place to put your money just like your CD's. And your take on life insurance is just as sick. Did you remember to tell your audience that the 20 or 30 year term policy that they carried will expire. And like your step-mother, their health may change unexpectedly. I don't think she was buying any life insurance... let alone permanent insurance. Goofball if you are successful in life you will always need life insurance and I hate to tell you but term insurance doesn't cover the need.... I think you need to go back and take some insurance courses. You are a little young and wet behind your ears...One day you will mature..

A. I appreciate your comments, but can't agree with them.

As far as education, it appears that I've taken a few more insurance courses than those required for the CSA.

I do use permanent insurance and have written several policies--for sure not as many as you. The times that I use it are to fit a specific need.

You say that if someone is successful that they will always need insurance. That's simply not true. If they are successful enough that they will have an estate tax problem they may have a need for permanent insurance. But if that's the case, the amount sold to them earlier in life was probably much less then they needed.

On the other hand, most people who are moderately successful don't have a need for insurance later in life. The three reasons to have life insurance are as income replacement, to help cover estate taxes or to create a larger inheritance for their heirs.

If someone retires at 65, they no longer need insurance for replacement reasons if they have built a nest egg large enough to provide for their standard of living the rest of their life.

If they aren't in a taxable estate situation then they don't need it to pay for taxes.

If they don't care about leaving more to their children they don't need it for that either.

Why then does someone in that situation need expensive, permanent insurance--other than to provide a commission for the agent selling it?

And in my experience, that covers probably 90% of the people out there. If they need income replacement while they build a nest egg then term is a much more efficient way to do it.

You are not the first to complain about my views and I know you won't be the last. I find it interesting that I haven't had any financial planners complain about my views. The only ones that complain are those who stand to profit from selling these investments.

Most likely, you heard about me from one of your clients who used the information I provide when they decided not to follow your advice. If that's the case, then I have accomplished my goal.

Have a great day!

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Managing Your Own Plan... Are You Ready For This?

Q. In searching for a local financial planner, I found your website and read some of your Q&A postings. My wife and I are looking for an independant professional to review our finances and provide us with a plan that we would manage ourselves as we prepare for retirement. Our net worth is about 500k including home and business equity. 70k is in retirement acounts, 35% equities and 65% funds, and about 65k is in surrender value of life insurance. Our combined salary will vary between 115-200k over the next 5-8 years. I'm 50, and my wife is 45.

A. When you mention that you are looking for a plan, do you mean you want all the spreadsheets that show that if you save X per year and earn Y that you will achieve Z?

I've done plans like that in the past but have found they haven't been that useful to clients in the long-run. Sometimes they provide a false sense of security...

If that is what you are looking for then I probably am not your guy. On the other hand, if you are wanting someone who will look over your situation and point out weaknesses/adjustments that should be made, then I am happy to do that.

Along the way I can share information about what you need to do to achieve a comfortable retirement, etc.

You are at a very important time and the decisions you make the next few years will greatly impact your ability to retire.

Q. Yes, this is exactly what we are after. A knowledgeable person and advice to address our weaknesses and suggest adjustments. Feel free to call anytime, just say #### is expecting my call.

A. A few thoughts (after a relatively brief phone conversation)....

There are several things that come to mind, so I will just throw them out for your consideration.

It sounds like you will be relying on the business to provide a big portion of your retirement assets. Businesses are valued based on their profitability times a capitalization rate plus the value of assets and inventory. Sometimes you can price in some goodwill, but that is difficult to do. It is also difficult for people to get financing for such a purchase so it might be hard to cash out and there are a lot of issues with carrying the note.

Even if you think it is 10 or more years away, you need to start putting a transition plan into place. There are two key areas that need to be dealt with--your premature death and the retirement exit strategy. Since the business has significant value to your estate it is important the there be a way for it to continue in the event of your death until it can be sold. It can take years to sell a business unless you want to make it a fire sale.

Are there any employees that would be able to run the business in your absence? Would it be possible for your wife to hire someone to take your place to keep the biz running smoothly until sold, etc. The more you can put together a plan the easier it will be for all concerned. For instance, you wife will need to know where she can find all of your passwords and where you have the important files stored, etc.

As far as the sale, it will be best by far if you can find an employee(s) that will want to buy you out. If possible you can even structure it so that there is a general transition. If not, you will want to start preparing your balance sheet several years in advance of pursuing an outside buyer. Profitability is the key. If you were looking at buying your own business and were wanting to maximize your return on investment, what changes would you make? Are there market segments that aren't generating enough return to justify the time, effort and expense? If so, do away with them. Can you get by without all the employees? If so, eliminate some positions.

You will want to have 3-5 years of great looking balance sheets to get a good price when you go to sell.

There are also issues with the ownership structure between you and your father. If he were to die, will you inherit his 50%? Would the note on the building be forgiven? If you won't inherit the other 50% and will need money to buy out siblings then that needs to be addressed so you aren't caught in a bind. Either way, it will be important for those shares to transfer as quickly and easily as possible. That means that your father should have a living trust and the living trust should own the shares of the Sub S. That way, the shares can be transferred almost immediately after his death without the involvement of attorneys or the courts.

Maximizing the profitability will help you with the next need, which to to begin putting away as much money as possible for retirement. Depending on how much you will be able to put away we may want to look at a different type of retirement program---probably a SEPP instead of a simple so that you can maximize your before-tax contributions. You will also want to max out ####'s as well. Obviously, this will be much easier once college costs get behind you...

Insurance. This relates back to the biz contingency planning. It appears that if you were to become disabled that the family finances would be greatly harmed and the ability to put aside additional money for retirement would end. In other words, you would face pressure with both current and future income. You should look into some long-term disability insurance. It is normally pretty expensive. You might want to look into some sort of company benefits package that would allow employees to purchase LTDI as well because it might give you group rates.

Life insurance. You are terribly underinsured. You currently have only about 3 times your annual salary and that doesn't count have enough funds to pay off debt or provide for #### longer-term. If you were to die she would be in a world of hurt.

Without even sharpening a pencil, it is easy to see that you should probably have at least $1.5 million in insurance. There should be much more in key man for the business as well. I would think you would want enough to cover payroll and overhead for about 6 months.

That being said, don't buy whole or universal life. In your case you want as much coverage as possible for the least cost. That means you want term insurance. You can get it from companies like First Colony,etc fairly cheaply. THIS IS SOMETHING YOU SHOULD START IMMEDIATELY. You can check the internet for companies like Zurich direct, etc.

Once you get the term coverage you can then get rid of your whole life/ UL policies. That is expensive insurance and it will free up those funds to use to cover the cost of the term.

#### should probably have several hundred thousand dollars in insurance. Have her check to see how much she can get through her job, even if she has to pay for it.

Estate Planning. There are some issues here. If you were to pass away, it will take #### quite awhile to be able to do anything with the business from an owner's point of view because your shares would have to go through probate before they went to her. If the company building is titled in the Sub S that would have to go through probate as well (technically it wouldn't go through probate, but the shares of Sub S would have to go through probate to go to ####).

Because of this, it will be best for you and #### to have a living trust as well. That way the transfer is seamless and there will already be someone set up to manage assets should one or both of you become incapacitated. In the process of getting a trust, your wills will be updated and you will also get all the necessary powers of attorney.

I hope I haven't overwhelmed you....and this is just from the brief conversation. Your biggest weaknesses have nothing to do with your investments at this point.

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Annuities and Insurance - Revealing Offers

Q. So glad I stumbled onto your website. I wanted to ask you a question about EIAs. There's this company called #### which endorses Equitables Annuities. They had no cap in terms of growth and guaranteed 6% a year. Are you familar with them? The representative stated something to the fact that if you invest $15,000 today; you'll have the same amount as you will get from Social Security.

Also, I know I read how you prefer term insurance vs. permanent. Unfortunately, I didn't stumble upon your website until now. I have had a permanent life insurance policy for a year. I know that in the first year 90% of my premium went to the agent. My question is -- shoud I stop now and take my losses? I like the idea of borrowing against your policy and being protected. The reason I didn't choose term is because currently I'm 30 years old; and I figured in 30 years I might still be working, but may not be as healthy.

Thanks for the advice.


A. Thanks for your questions and I'm glad you enjoy the website!

Like many things in life, the devil is in the details. When an agent tells you that a variable annuity provides a guaranteed 6% return, he/she is not telling you the whole story. This 'feature' is generally termed the guarantee minimum income benefit, but each company has their own name for it.

The problem is that there are all sorts of details attached to earning that 6%. Typically, you have to do some form of annuitization to get it and they don't allow you to annuitize for the first 7-10 years.

I will have an article that will cover why I think this is a sham benefit in a couple weeks, but here are just a few points. First, only 2-3% of policy holders annuitize. Most insurance companies charge .50% per year for the benefit and they collect it on the entire balance every year--EVEN IF YOU NEVER USE IT.

Secondly, the insurance company knows that the probability of you owning that policy in 7-10 years or that the market won't provide higher returns is very, very small. If the market returns higher than an average of 6% per year then you've paid for nothing.

The big question is why is the salesperson (that's all they are!) recommending a variable annuity in the first place? If this is an IRA there are better places for it that allow you to retain your flexibility and earn more. If it's after-tax money, he/she is probably telling you it's a great way to defer taxes. This is bogus because with current tax rates it is better for you to pay the taxes now (be able to deduct any losses) and to have complete control/access to the money.

I don't know if the #### rep is the one who also sold you the life insurance policy, but I find it interesting that the recommendations all seem to be for the highest paying commission products. If so, I would highly recommend finding another advisor or doing it yourself.

If you find another advisor, find one that is fee-based or charges by the hour.

Concerning your life insurance, there are several things to keep in mind. Your situation will change remarkably over the next 30-40 years. You will undoubtedly need more life insurance along the way because the death benefit on this policy won't be enough to cover your needs. Inflation alone will keep it from meeting your needs.

The agent talks about the ability to borrow from the policy, but the funny thing is you are only borrowing your own money! That money is only there because you paid in 'extra' in every payment.

It's true your health may change as you get older. I recommend buying term policies for the additional insurance you will need along the way. I know you can get 20-year term and I'm sure there are companies that offer 30-year term.

If you buy term insurance that is convertible, then you are covered should you become uninsurable.

I don't know what to say about your existing policy...

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Annuities Unfairly Attacked?

Q. I was recently forwarded a copy of your article regarding equity indexed certificates of deposit. I read with some interest your comments regarding the following, "Equity-Indexed Annuities are probably the most heavily promoted investment for seniors in today’s marketplace. The sales pitch is appealing and the payoff to the agent is very big—up to 13%. The enormous commissions have led to sales abuses which leave seniors holding the bag."

As an industry professional, I realize that there are many products with over-the-top compensation. But there are also many many more with reasonable payouts to producers. In the past few months, many annuity products have been unfairly attacked and lumped in with many other annuity products. The reality virtually every financial product out there has room for abuse, and if a person selling this product lacks scruples, abuses will occur. I hope you share with your clients and potential clients that fact. There are those of us who work very hard to do an outstanding, ethical job for our clients and we really do not appreciate being lumped into the same pile as those who don't.

A. I agree that there is the potential for abuse with most financial products. My criticism isn't just of EIAs, but most other commission-based products as well.

I believe there is an inherent problem with the commission-based compensation system being used by the financial services industry. Other reputable professions such as doctors, lawyers, and accountants don't work on commission and they tend to be highly trusted by their clients. True, many accounting firms are starting to leverage that trust by getting into the financial business....

I want to see our profession be on par with those I mentioned. Especially with all of the scandals that are constantly in the news, it is vital that as an industry we remove as many of the inherent conflicts of interest as possible.

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Is Existing Real Estate Cash Flow Enough?

Q. We are retired with a fair pension and have invested in real estate over the years and have a good cash flow. However, there is quite a bit of dead equity in real estate and we have heard about TIC's. What is your opinion about them?

A. If you are wanting to get rid of existing RE without having to pay the capital gains taxes now, then a 1031 Exchange into a TIC can make sense. They are expensive as a result of commissions and management fees and with capital gains rates as low as they are now it may make more sense to go ahead and pay the tax. Then you could invest in REITs with much lower cost and greater flexibility.

The issues to consider are the current return you are making in the real estate, the management hassle and how much it is apppreciating.

If you are getting a nice rate of return off of the cash flows and it is steadily appreciated, then you can also consider borrowing against the real estate to free up equity. Increasing leverage (as long as you do it wisely) will increase your return on investment from the rents.

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Avoiding Recommendations That Keep You In Annuities

Q. Jeff, I have previously contacted you and do receive your weekly letter.

My wife has 5 variable annuities (UGH) 2 American Skandia ASAPII, 2 ING Premium Plus, and 1 Allianz Alteriity.

The Skandia and Ing consist of a qualified and a non-qualified, the Allianz is non qualified.

The Skandia ones will not have any withdrawal penalties after mid Jan. 2006 The combined value is in excess of $250,000. My wife will be 57 in August and we may want to start withdrawing money when she is 59 1/2.

The annuities have done well the last two years, 34% in 2003, 23% in 2004 and 7.5% YTD 2005. Most of the gains have been in Cohen & Steers Realty and T.Rowe Price Natural Resources.

I am concerned about protecting the money and am exploring options as to where to go with it in early 2006. I know I can leave it at Skandia and try to find conservative funds. I can roll the IRA money into another IRA invested in various funds elsewhere. Our estate planner suggested the index annuities which I quickly said NO.

I am looking for some input on how to get away from these annuities.

I do use a broker for my own investments, and he has the Allianz annuity, but I'm not certain he's got the answers. For reference, I am 10 years older than my wife. I would appreciate any comments you may have.

A. First, you've really got to question whether you want to continue working with the 'estate planner' who recommended the EIA. Often, brokers and agents use terms like 'estate planner' to make themselves look like something other than what they are---financial salespeople. It's obvious you're smart enough to figure that out.

Regarding your existing annuities, the issue as I see it is cost and control. The returns you've had the last couple years are great--but I imagine that you aren't diversified very well. Don't make the mistake that many made in the late nineties by moving most of their money to the hot sector....

Since your wife if under 59 1/2, I would transfer the non-qualified annuities to a no-load annuity like Vanguard so that you don't have to pay the IRS penalty for pre-59 1/2 withdrawal. Vanguard will be much lower cost and give you complete control. After 59 1/2, you should probably tap those funds first. You could even look at annuitizing over a 5 year period so that each years payment would be a portion principal and a portion interest. If you aren't in a higher tax bracket don't worry about annuitizing....

The qualified annuities should definitely be rolled to an IRA. The only thing you will be losing is the death benefit guarantee but you will be saving a couple percent a year in fees.

As you know, I am weary of commission-based advisors and the broker you mentioned is no different. You will always have to be weary of recommendations. If you are making investment decisions yourself then you should be using a discount broker.

When the time comes I will be happy to provide a recommended portfolio and to tell you more about the proprietary money management strategies that I've developed. They are designed to provide Equity Indexed Annuity-type benefits without any commission, time-commitments, set-up fees or surrender penalties. That means you retain complete control and flexibility.

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Choose Fixed Annuities Over Equity Indexed Annuities?

Q. Jeff, I have been investigating different ways to invest my monies. Fortunatley I have stayed away from EIA's because if something is too good to be true it usually is. I have been looking at different fixed annuities with anywhere from 3 to 4 percent guaranteed with usually a 3 or 4 percent bonus the first year. The average fixed annuity is then going to 3 to 3.5 percent for the next 4 years and then what ever the market is after that. Do you feel fixed annuuities are a wise investment choice?

A. Thanks for your questions. I'm glad you've been smart enough to stay away from Equity Indexed Annuities.

I am not nearly as opposed to traditional fixed annuities. I'm not as big of a fan of those that lock you in for several years but only tell you what you'll earn the first year or so. I prefer the ones where the rate is locked in for the entire period for which there are surrender charges.

So if there are 5 years worth of surrender charges, I would want to know what the rate was for the entire 5 years. Otherwise, you have given the insurance company too much control. For instance, you know there isn't such a thing as free money. If they pay a bonus the first year they are going to pay you less than the market rate the subsequent years.

Also, beyond the minimum, the insurance company can set the rate wherever they want and your only recourse is to accept it or pay the surrender penalty. Either way you lose.

The other question is whether now is a good time to tie up money in a fixed annuity for 4-5 years. The rates that you mentioned aren't high enough to justify locking it in. You can earn similar rates on money markets (ING or Emmigrant Bank) or CDs that have a shorter time commitment.

Short-term rates will continue to go up. Rates today are close to 2% higher than this time last year.

If you are to get a fixed annuity, I would suggest waiting until rates get closer to their norm.

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Retirement - Joint Life Immediate Annuities?

Q. I am thinking about buying a joint life immediate annuity for part of my retirement package ($640,000 to buy $41,000 a year). I have an additional $550,000 in 401K and $250,000 in money market account paying 3.25 APY.

I will retire December 2005. I am 59 and my wife is 57. My father is 87 and my mother dead of lung cancer at 72. My wife is in good health and her parent died at 76.

Does it make sense to buy a joint life immediate annuity for part of my retirement?

Is there an alternative to an Immediate annuity that will give me the same income stream without any risks?

A. These are great questions!

There are several issues to consider when deciding whether an immediate annuity is right for your situation. It would be helpful to know what you expect your annual expenses to be so I could run some calculations with those--let me know and I'll add that to the suggestions.

The insurance company is going to use an actuarial table to estimate your (or you and your wife's) life expectancies. They then calculate out what payment will return all of that money plus an assumed interest rate over that life expectancy. Of course, they leave room for profit, but most of their profit will come from using that money to earn more than they pay you.

If we assume a 25-30 year life expectancy for you, then the internal rate of return on the immediate annuity is between 4 and 5%. There are several things to keep in mind with this.

First, if it is on your life only (and there isn't a 'period certain') then if you died a year after getting it your wife would get nothing. In this situation the life insurance got the $640,000 with very little expense. Even if it is a joint-survivor annuity, if you both die, say before age 70, then the insurance company has won the lottery again.

On the other hand, if you live longer then the insurance company expects you to, you ended up earning a little more than the 4-5% internal rate of return.

Second, you give up any access to that money if you do an immediate annuity. It's true you have access to the 401(k) and money market money, but you will be giving up access to over half a million dollars.

Thirdly, your annual payment in an immediate annuity is mostly made up of a return of principal. In other words, most of the payment is just getting back your original investment. So when comparing it with other alternatives, you want to compare the internal rate of return (4%-5%) to what is available, not the $41,000 payment. In other investments you can always use some of your principal as well, but it is competely at your discretion.

Lastly, the interest rate. 4-5% today sounds OK based on where current interest rates are. But your payment won't change if interest rates go up in the future with the immediate annuity. Historically, interest rates have a much higher average then they do today. In other words, as interest rates go up it becomes much easier for you to get the equivelent income off of other investments.

Very few people use immediate annuities because of the lack of control. It seems to me that 4-5% isn't enough reward for giving up $640,000.

One thing to keep in mind is that you don't have to get the immediate annuity right now. Another option is to roll that money into an IRA and to wait for interest rates to get closer to their historic averages. You can then purchase an immediate annuity which would be using a higher internal rate of return which will result in a higher annual payment.

There are many alternatives that should allow you to average greater than 4-5% a year. You mention alternatives without any risk, but that isn't a correct comparison because there is considerable risk of loss in the immediate annuity--if you die early you lose significant dollars!

With the right investment advisor and a proper mix of investments and strategies you will be able to retain all of your control and flexibility over that money, be able to pass it on to your heirs when you die and still have access to it whenever you want. You won't be locked in to a set amount each year. For instance, I use a stable investment with my clients that pays a monthly dividend between 6-7.25%. There are many other alternatives I can suggest as well. (If you would like me to put together a recommended portfolio just let me know.)

Regardless of whether you get the immediate annuity, be sure to read my articles on choosing a financial advisor. You have a big target painted on your back and every broker and insurance agent is going to be aggressively seeking the huge commissions they can make off of you. I highly recommend avoiding a commission-based advisor at all costs. Also avoid any investment that will lock you in for many years with surrender penalties.

Feel free to ask me as many questions as you like--what to do with this money is probably one of the biggest decisions you will make in your life!

Q. Dear Jeff,
Thanks for your advice.
I can defer my lump sum until I reach 62. As you know the lump sum is based on the 30 year US note. My lump sum uses the average of the month of August 30 year note. Last year it was 5.03%. This year it should be lower, giving me a higher payout. I also get an additional 5% added to the lump sum every year until I reach 62. I am now 60.

To answer your question, I need $66,350 a year before taxes for yearly living expenses and my house is payed for. We also have long term care insurance.
If you don't mind maybe you could run some numbers and give me an example of a portfolio.

A. How about some good news?

It looks like if you were to retire today that you would have right at about $1,500,000 in investable assets.

Based on needing $66,000 a year, you only have to earn 4.4% to make ends meet without touching your principal. Once you turn 62 you can begin drawing SS which will probably be around $15,000 per year. When your wife begins getting SS that would even further reduce the demand from your investments.

It's not hard to see that by earning just 5-6% per year (which is very doable) that you could live comfortably, increase your income each year and still see your nest egg grow!

In other words, you and your wife have already successfully accoplished what very few people do--you are financially free. Managed correctly you won't have to worry about money the rest of your life! Congratulations! You should both feel proud of what you've accomplished.

So, you can retire when you want to. You don't have to keep working if you don't want to. On the other hand, if you want to keep working you can and that will only increase your security. Getting a 5% kicker on your pension each year quickly adds up.

One thing to keep in mind is that many people have things they've always wanted to do. Maybe it's to travel or to take the grandkids to Disney World. Maybe it's buying that home on the golf course. It doesn't matter what it is. The thing to think about is what are the dreams you and your wife have always had but still haven't been fulfilled?

How would retiring or working another two years impact fulfilling those dreams? Some people make the mistake of waiting too long, thinking that they will always have time only to find out that their health, energy or desire can quickly change.

My father and step-mother found that out the hard way. He is 71 and still works probably 70 hours a week because he loves what he does. He and his wife always wanted to travel and thought they would have time once whatever project he was working on was finished. She has since had 3 open heart surgeries, blind in one eye and losing sight in the other.

They waited too long.

Life is precious. I'd hate for you to look back in twenty years and have regrets. There are many things that are much more important than money.

http://www.guardingyourwealth.net/investing/articles/investinginlife.htm

I may have gotten off the subject a little. If so, forgive me.

Financial freedom is a significant accomplishment.

I am happy to help in any way I can. I act sort of as a private mutual fund manager for my clients and provide them strategies that are designed to protect their money while helping it grow. The strategies I use are proprietary--you won't find anything like them anywhere else. As you getting closer to retiring, let me know and we can talk about it further...

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ELCDs - Seeking Safety With Better Return

Q. I currently have some retirement savings sitting in a company-sponsored 457 plan that is earning 3-4% annually. I am quite risk-adverse and thought that ELCD's might provide safety with better return. Is my assumption true and do you know of any highly rated offerings and credible brokers who sell them?

A. The ability of ELCDs to earn greater than the 3-4% of your 457 is entireley
dependent upon the return of the S&P 500. With most ELCDs that allow you to get a full 100% of the return, they don't provide any return other than that of the index so, although you wouldn't lose principal, you might not see return. You should be able to find some that provide a minimum return but they will give you less of the index.

As far as where you can look for them, I would check with Fidelity. You should be able to open a retirement account and roll your 457 to it if there has been a 'triggering event'. With Fidelity, you should be able to buy them with very little cost.

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Family Sticks Together To Protect Unnamed Beneficiary

Q. My brother passed away suddenly 5 months ago. He had no will and had recently gotten married. He had been an executive with a large company and when employed 10 years ago named my father as the beneficiary of his 401k and simply forgot to change it to his wife.

My father got the surprise call from the HR dept. that he was the beneficiary. I am trying to assist him as he is in poor health and in no position to make financial decisions. Who should we contact? Shouldn't this money automatically go to his wife?

A. My condolences for your brother's passing. It must be very difficult for you, his wife and other family.

When someone dies without a will it is called dying intestate and each state has their own rules for intestate succession. Therefore the laws of the state will determine to whom his probatable estate will be passed. Assets that have beneficiaries named, such as the 401(k), are not a part of the probatable estate because they pass directly to the beneficiary.

You will want to talk with an estate attorney. Most states have provisions that will allow the wife to get something. In Tennessee, the wife would only receive 40% of the estate if they had been married for at least 10 years.

Your father has the ability to 'disclaim' his interest in the 401(k). That means that he is denying his right to receive it. In that case the 401(k) will go to the contingent beneficiary. If there isn't one then it will become a part of his probatable estate and thus a portion of it can pass to his wife. The problem is that the 401(k) will be taxable in this situation because it will no longer be considered a 401(k), so a big chunk of it will immediately go to taxes.

I'm not sure how big your brother's estate is, but whoever does receive his assets can always then gift money to his wife. Each individual can gift up to $11,000 per year without any Federal tax issues. Check to see if there will be any gift taxes at the state level.

Q. Thank you so much for your response and kindness. My brother lived in Chicago and my father in Ohio. I will take your advice and help my father get an attorney. The amount of the 401k is $150,000. My brother was married only 2 years to a wonderful woman who cared for him quite well. In my heart I feel that he would have wanted her to have all of his money and items (over 1 million in real estate, huge savings acct) or a tiny portion for the education of his 2 young nephews and charitable causes. My father (the beneficiary) is very well off and was named beneficiary because at the time he was the closest relative. Lesson here..........young healthy people still need wills!!! You can be sure my husband and I have taken care of that! There is no financial hardship in our family so it doesn't really matter but I'm sure with better planning a big chunk of taxes could have been avoided.

Do you have a branch in Ohio? We have no financial planner here and could use some assistance. We have done our wills and trusts, living will and power of attorney but I'm not certain we have all our ducks in a row. My husbands company has a legal plan we used and although the attorney was very kind and pleasant ~ he did not personalize our documents (used a "template" for our docs.)

Thank you again and if you have an office here or a recommendation I would happily support your efforts.

A. I have about 30-40 clients that I work for and over 50% of my clients are outside the state of TN. With phone and email, distance isn't much of an issue. For instance, I have a couple in Montana that I've never met in person that I've been doing financial planning for about 2 years.

I will be happy to help you and your family (father, sister-in-law, etc.). Feel free to send me questions just like you initially did. Also, it will be helpful for you to email me copies of any investment statements and your wills.

Initially, the most important thing will be to verify that your estate documents accurately reflect your wishes. From there we would verfiy that you have the right amount and proper kind of life insurance and then look at your investments. Many times people have too much or the wrong kind of insurance and you end up not using that money wisely.

It might be that you just need a review of you situation with recommendations of simple changes you should make. It may be that you need/want some investment management. If so, we can talk further about what I do, what it costs, etc.

Does that sound like a plan?

If so, let me know more about your situation. Kids ages, first/second marriage, any grandchildren, annual income, occupations, value of home, real estate investments, etc.

Let me know what you will want to happen if you/your husband pass away and I will verify your wills reflect that.

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Conflicting Advice and Actions You Can Take

Q. My mother is trying to make some financial decisions regarding her investments. Neither she nor I know much regarding this. She does have a financial counselor, but she has gotten conflicting advice regarding a municipal bond in which she invested $30,000. She is in the 10-15% tax bracket. Her advisor states this is a bad investment for her, but the bank where she was advised to do this tells us it is a good investment. She has had this invested since approx. Feb. The value now is slightly more than $34,000. It is in a Nuveen Class B bond. Her advisor has given us reasons why this is not a good investment, but quite frankly I'm not sure that I truly understand, and my mother REALLY doesn't understand. I feel I need the reasons somewhat simplified so that I can explain to her.

I have confidence in her advisor, but in order for me to either convince her or agree that her investment is a good one, I feel as if I need to be able to explain this to her more simply.

A. You've come to the right place. Thanks for asking.

The big advantage of a municipal bond is that you don't have to pay income tax on the interest you earn, whereas on an investment like a CD you have to pay taxes.

That being said, it normally only makes sense to buy a municipal bond when you are in a higher tax bracket. If someone is not in the higher tax brackets they should be able to earn more on a fully taxable investment.

Let me say this differently. In you mother's tax bracket, she could have a taxable investment, pay the taxes on what she earned and STILL end up with more money to buy groceries than if she has the municipal bond.

You mentioned that she was in a Nuveen Class B bond. It sounds like this is going to be some sort of bond fund where she paid a commission to get in (even if she didn't see it). As a result, it is probably worth less than when she bought it.

See what she can sell it for. If it is more than when she bought it then sell it. If it is worth less than when she bought it you or she should contact the compliance officer who oversees the investment part of the bank that sold it to her. This sounds like it was an unsuitable investment and she should press them to get all of her money back.

They will initially tell you that it's her problem and not theirs (but probably in more polite gobbly-gook!). If that's the case, tell them that you will file a formal complaint against the broker and the bank. To do so, you can go to the NASD website and file the complaint right there. It may not help, but there are strict procedures that firms must follow every time a complaint is filed.

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Earning Interest With Ready Access to Funds

Q. My daughter lives in Colorado, I live in Oregon. my daugher is mentally unstable due to health conditions. I have power of attorney. she has refinanced her house for fifty thousand dollars. she wants to have the money wired to my account and I would make her morgage payments and pay her bills. as she does not handle money well. Is there any way I could invest her money so that she would earn more and still take out money for her monthy bills?

A. Yes there is. First, I'm trying to understand the reason for the refinance? Is it because she will need that money to live off of?

If so then it will be important that the money is easy to access while earning a little bit of interest. There are money market accounts that allow you free access to the money via check or ACH (electronic transfer). Typically, the rates at your local bank aren't anything to write home about, but there are some national providers that pay rates comparable to CDs. Two that come to mind are ING (they call it their Orange account I think) and the other is Emmigrant Bank out of New York.

Recently, Emmigrant had the highest rate in the country. You can find both of these (and others) available on the internet.

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Minimizing Penalties When Getting Out Of Annuities

Q. I, like others was caught up with an advisor that uses variable annuities and indexed annuities as his "tools" . I have a substantial amount in both (entire retirement assets) and want to go to Vanguard with a "coffeehouse" type portfolio for my retirement. Can I roll over these Annuities when I reach 59 1/2 to Vanguard Index Funds and take the internal loss of the Annuity penalties without getting into more trouble with the IRS? I do NOT take any distribution from these Annuities and didn't plan to until 60. (3 years)

A. It sounds like the money in annuities is retirement money. If they are IRAs then they can be transferred at any time to another IRA without any IRS penalties. Of course, you will have any penalties imposed by the insurance companies on the annuities.

I wouldn't recommend paying penalties if they are over a couple percent. Instead you can transfer out the penalty-free amount each year until the penalties get lower or until all is transferred out.

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Proceeds From A Reverse Mortgage

Q. I recently read your article regarding "Thelma" and her son "Ted" who were pursued by their Medicaid state officials for repayment of Thelma's elder care expenses.

My question is: How would the situation have been if Thelma had obtained a HECM (reverse mortgage) guaranteed by HUD and HUD would have given son Ted time to refinance or sell Thelma's house, after her death to repay the reverse mortgage? Would the state Medicaid agency have to" back off", give preference to HUD as regard the house and not seek recourse from Ted for the $85K they were seeking?

A. I'm not a lawyer so what I am presenting here is my opinion based on my research and experience. The States typically will put a lien on the home. If there was a reverse mortgage it would seem to me that the reverse mortgage lender would receive their portion and if there was any remaining equity that it would go to the State (up to the amount they spent).

In your example, if Ted's name was not on the house and the reverse mortgage then he could sell the home, but the state and the reverse mortgage lender will get their money at closing. It's not unusual for the children to go to sell the parents home, to be at the title company with the buyer ready to sign the papers, only to find out that the state had a lien on the home. In that case everything typically is put on hold and in all likelihood the buyer moves on to another home.

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Am I Making Money At This?

Q. (A thank you & comment)...By the way; how do you make your money, giving away free advice?

A. I don't. I have about 30 clients that I manage money for--I'm sort of like their private mutual fund manager. I make all the investment decisions and take action when necessary to protect their principle. To that end I have developed a proprietary system on which 4 patents are pending. The system is designed to allow someone to participate in the market while knowing that their potential for loss is strictly limited. And it's done without a large commission up-front, time commitments, surrender charges, etc.

Occassionally someone that I have provided free advice to will become a client. As you can see, though, it's not something that I strongly pursue.

I am not opposed to large commissions--I've earned them myself on life insurance in the rare times I use it. My dislike of the commissions related to Equity Indexed Annuities has many reasons. First, it creates an incredible conflict of interest on the part of the advisor. When you were selling your machinery, the people you were talking to probably understood that you represented one company and were going to use their machines to solve the problem. Few people being pitched EIAs are told that the person selling it doesn't have access to other investment products and doesn't have a background or training in providing investment advice.

Secondly, it was normal for someone buying a big piece of machinery to earn a large commission. I imagine your sales cycle and volume are considerably longer and lower than for other products. That's not the case with EIAs. The commissions are huge when compared to the other investment options available and there are comparable, if not better, alternatives out there without all the costs.

Lastly, we are in a new world where terrorism is a real threat. For those who are retired or getting ready to retire it is much more important that they keep control and flexibility over their money. That's why I am opposed to any investment that locks an investor in because it has high surrender penalties that last for years and years. Why should I have to pay an automatic penalty if I decide I want back more than 10% of MY money?? It might make sense if you were being well compensated for that fact, but you aren't in EIAs.

You mentioned comparing costs. The best way to compare costs is in the surrender charges. There aren't any automatic surrender charges in ELCDs. There isn't much of a secondary market, but you can get ELCDs with terms of only 3 years.

One other thought. If you have so much of your overall portfolio allocated to the markets, wouldn't it make more sense to diversify into income-oriented, fixed type of investments that will have a negative correlation to the market? With an EIA you are essentially having the return based on the same as the rest of your portfolio.

Money management fees. Imagine if one of your customers could get one of those plastics machines...but instead of having to buy it they could rent it. Further, if they rented it, there wouldn't be any time commitments or costs to end the rental. That way, if there business model, technology, outsourcing, etc. changes, they can easily adjust. They could be using the latest greatest each year. Just as importantly, if they started using a machine and didn't like it they could make a change without losing all that commission money.

That's the difference between paying an advisor a fee versus a commission. Will it be more over 10 years? Yes, but only if you use those services for the 10 years. If you decide to go it your own after 5 then it is a lot cheaper. More importantly, the only way the fee-based advisor is able to keep your business for 10 years is to keep you satisfied. If the investments aren't working, if they don't like what the advisor is doing, they walk. It's not perfect, but it removes much of the conflict of interest.

On the other hand, with an EIA or other commission-based investment, the investor is in essence paying the advisor for 7-10 years worth of service up front--regardless of whether they ever hear from the advisor again, regardless of whether they are satisfied with the investment, etc. I won't pay a doctor, accountant or attorney for 7-10 years worth of services up front so why should advisors expect it?

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Conservative Investing - Alternatives

Q. I have read several of your articles on the downsides of EIAs and I understand what you are saying about many of the ommission-paid agents out there. I can see why they would want to push the products.

As a very conservative individual who does not know that much about investing, is there something out there where I can get a guaranteed income, no market risk, no management fees, and be able to make a decent return? I have most of my money in CDs because I don't know anywhere else to protect my money. Right now protecting what I have is more important than the big 23% returns.

A. If you are looking for something that is FDIC insured, where there aren't any commissions and yet you can participate in the returns of the market then take a look at Equity-Linked CD's.

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Baby Boomer Stocks

Q. I believe that the baby boomers will drive the stock market for at least the next 6 years. Please give me 8 baby boomer stocks or a mutual fund that believes as I do. Thank you!

A. Just about every mutual fund manager will agree with you and will be positioning their portfolios long-term to try and benefit from the boomers. I know Hartford has been talking about that for at least the last 5 years.

I would recommend Jim Cramer's Mad Money if you are looking for a list of individual stocks that should profit from boomers. For instance, I know he is a fan of United Healthcare, Altria, General MIlls, etc.

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Family Friendly Equity Indexed Annuities?

Q. Hello Jeff,

I'm considering the purchase of a $175,000 Equity Indexed Annuity from a trusted independent insurance agent and a close family financial advisor. He is not an investment broker and the transaction will not be going through a licensed investment broker. Am I doing the right thing? Where am I vulnerable? What would you advise?

Thank you in advance.

A. Has your friend mentioned that he/she stands to make close to $17,000 off the deal?

There are several concerns here. First, I am not a big believer in Equity Indexed Annuities. Check out my website for several articles and details. The main reason is that they force you to lose control of that money for several years because of high surrender penalties. The only reason there are surrender penalties are because that's how the insurance company gets back the huge commission it paid the agent.

Secondly, the fact that your advisor is just an insurance agent means that he/she must solve all your needs through insurance products. Equity Indexed Annuities are the only product that an insurance agent can offer that is in any way tied to the market. He/she can't offer you real estate-based investments, stocks, bonds, CD's, mutual funds or anything else. It's like asking a podiatrist to operate on your heart! (not recommended...) There are many alternatives that can provide similar or higher returns with the same amount of risk that don't lock you into them for 10-15 years.

If you must have an EIA type product then look at Equity-Linked Certificates of Deposit. This is a FDIC insured CD where the return is tied to the market. They operate virtually identical to EIAs but since there aren't big commissions paid to an agent, they are much more liquid and don't tie your money up as long. You can find ELCDs for as short as 3 years or 7 years. The penalties to cash them in are trivial compared to those of Equity Indexed Annuities.

Thanks for your question. Be very skeptical...

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Trapped Into Rolling An IRA Into An Annuity?

Q. I believe I've been trapped into rolling my IRA into an annuity. What is the best approach to correcting this problem?

I'm 70 years of age and am inclined to buy and hold. Would ETF's be a good choice for me?

A. You options for getting out of the annuity without harm depends on how recently you bought it. If you purchased within the last 10 or 20 days then you should be able to cancel the transaction and not have any penalties. Check the annuity contract/statement of understanding and it will tell you how long the 'Free-Look' Period is.

If it's under that period and you need help let me know.

If you are looking for equity exposure and intend to hold securities for several years then ETFs can be a good choice.

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Medicaid - Look-Back Period For Property and Investable Assets

Q. What is the length of the look-back period for investable assets and property regarding medicad?

A. I believe the Medicaid look-back period is three years on gifts to an individual and 5 years on the transfer of assets into any type of trust.

Thanks for your question!

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I've Got The Best Plan - Or Am I Wrong?

Q. Hi Jeff..

I read some of your “free” informative articles and now have some questions.

Here’s some background:

I’m 62 (a smoker), with $500,000 in my 403b placed in a no front end or backend charge variable annuity. Presently, I have 95 investment choices to select from. When as and if I want I can “invest” in 50 sector classes (semiconductors, biotech, tech etc.), and 50 broad based mutual fund type sub-accounts, and if desired I can even go “short” on the major indexes and bonds. There is unlimited switching, daily if I want, at no cost. There are no withdrawal charges of any kind, so in theory I can move the funds or take 100% of the money at any time. If I leave the money for seven years, worst case, the insurance company guarantees at least my initial investment. Plus, if I want for an annual 25 basis point expense I can get a guaranteed minimum 5% growth; however, certain “black box” type conditions apply.

I have the entire portfolio invested in the Nasdaq type equity side of the market and I assume my downside risk, worst case, is 40%. Although during the recent year 2000 period the downside was considerable more than that. Fact is, I've got term life insurance quotes for protection on half my portfolio and the cost was quoted at about $4400 per year. Plus, the broker that sold me the product for no cost provides her opinion as to asset allocation switching.

Based on the above, as far as I can tell, I have unlimited upside, with no downside risk.

Alternatively, what can you offer and recommend? Exchange traded funds, No Load Mutual Funds, an advisor to advise on and manage the account? If so, can I trade the ETF and mutual funds at no cost and with no restrictions? If so, will the advisor that manages and recommends the switches do it for free? And very importantly; when, as and if the Nasdaq implodes will the ETF, mutual fund or advisor guarantee me at least my initial investment back?

Bottom line, based on the above and my market exposure it seems to me that any alternative proposed in effect will net-net be more expensive than what I got.

Am I wrong?

A. I am assuming that your email is in response to my articles on variable annuities. There is a considerable difference between no-load variable annuities such as those offered by someone like Vanguard and commission-based annuities. I still can't find too many situations in which I would recommend the no-load annuity...

You said, "If I leave the money for seven years, worst case, the insurance company guarantees at least my initial investment." I've never seen a variable annuity that will guarantee the return of 100% of your principal after 7 years without any cost or surrender charges.

Most variable annuities have a death benefit that guarantees the return of principal...is that what you are referring to? If so, then the investor still bears the investment risk. In other words, if the investor wants to use their money while they are alive then they only get the current investment value and hence there isn't a 'principal' guarantee.

The 5% option that you mentioned...I assume that with that option there will be time commitments and other requirements?

I don't see where you have unlimited downside (other than your entire investment) with unlimited upside, but that is based on the 7 year guarantee being a death benefit guarantee...

If it isn't a death benefit guarantee please let me know the company because I am interested in researching it further.

Whether your annuity is better than other alternatives depends on several issues. What M&E charges are you paying? What are the internal sub-account fees? How important is the death benefit guarantee?

My dislike of variable annuities is not only because of the commission-based surrender charges but also the other hidden fees.

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A Frozen 401(k) - Burns This Investor

Q. My question involves a 401(k). Back in August of 2002 I quit my job with company A. At that time I had a 401(k) which I was told I could leave, cash out or rollover. I left it. I have now decided I would like to remove it. The 401(k) is invested through #### so I called them. They told me I could not do anything with it because company A had put a freeze on the account and that I would need to contact them.

So I called company A, who informed me that Company A had been sold early this year and that their lawyers had recommended that they freeze all 401(k) plans until they had received some type of consent from the IRS, This should happen by Sept, 30, 2005. Is this legal? I am not an employee of company A. My account is listed as terminated and fully vested. Why can company A put a freeze on it? It's not their money is it?

I am the one who made contributions every payday.

Please let me know what you think? Should I send them a letter and ask them for something showing that this is legal? Any help would be great.

A. This is a tough one. I can't say I have a lot of experience in this area.

I imagine that the reason the freeze has been placed on the plan is because the lawyers are concerned about insider sales of the company stock during the process. If that's the case, the question is whether or not any of your holdings are in that stock. If not, I can't see why they wouldn't allow the transfer.

I agree that you should contact them and try to talk with someone in charge of the plan. Keep going up the chain till you feel like you have an answer. If you know an attorney (and don't make any progress), it might be worth having an attorney give them a call. Somehow, an call from an attorney always seems to get through to the right people....

This is just one of many examples why it is good to transfer a 401(k) as soon as possible--whether from retirement or separation from service. This is also why I don't recommend people roll the assets from one company plan into the company plan of a new employer.

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Will Our Assets and Income Affect Medicaid Benefits?

Q. I am 58 years old. My 61 year old husband has Alzheimer's and will eventually be placed in a nursing home. Our assets include a home that is paid for, valued at approximately $120,000, my IRA's and 401(K)s valued at approximately $600,000. My husband has an IRA of $7,000. My husband gets Social Security disability of $1,526. I get $1,400 a month from a lump sum pension buy out when I retired 4 years ago. I also get $500 per month from my employer until I reach the age of 62. I am concerned about my IRA's and 401(K)s--this will be my only income other than Social Security. I understand that Medicaid allows a monthly income of $2,200 per month.

Any suggestions?

A. Thanks for your email. I can understand why you are concerned
and feel for you in your situation.

Hopefully, I will be able to put your mind at ease...

The way that I understand that Medicaid works is that they view the assets of the institutionalized spouse (your husband) and the community spouse (you) separately. Since your IRA and 401(k) are in your name (even if he is the beneficiary), they should not count as his assets.

Social Security will count his disability income and his IRA. They won't force you to sell the home but after your death may go after his half of the proceeds.

One thing you will want to do is to make sure that your husband is NOT the beneficiary of your IRA, 401(k), life insurance policies or your will. If he is, that money could disqualify him from Medicaid or be sought for recovery if you were to die before him.

Let me know if I can be of further help.

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Leave It or Move It - Investing Your Retirement Funds

Q. I have recently retired at the age of 52 and I currently have a defined benefit annuity due to me. I have the option of taking the money out or leaving it in the defined annuity. I have $120,000.00 making 5.125% at the moment and I have been offered a Secure Plus Platinum Equity Indexed Annuity through Life Insurance Company of the Southwest guaranteed at 3% and capped at 8% for 15 years. Sh