It’s YOUR Money: Make Sure You Keep Control Of It!

One of the biggest mistakes I frequently see investors make is needlessly losing control of their money. Any time you pay a hefty commission or face surrender penalties in order to get YOUR money you lose control. Losing control severely limits access to YOUR money and limits your flexibility to make changes. This can trap you in an under-performing investment adding years to the time needed to reach your goals. Whose money is it? Is it your broker’s, banker’s or insurance agent’s? No, of course not. It’s YOUR money. Don’t believe the lie that says you have to pay a big commission or face years of onerous surrender charges to get an advisor’s help when you invest. It’s simply not true. Can you imagine your doctor or dentist asking you to pay them for 10 years worth of service up front? Then a professional advisor shouldn’t ask you to, either. Sharon is a real-life example. Sharon became a widow a few years ago after her husband died of Lou Gehrig’s disease. Her advisor put almost 90% of her money into variable annuities. Now her money is locked up for 10 years! If she wants or needs more than a small portion of that money she will have to pay a penalty that starts at 9%! That’s tens of thousands of dollars in surrender penalties. Whose money is it? It’s her money, but now she can’t get at it! Think about all of the reasons Sharon may want or need her money over the next 10 years. Her health could deteriorate and she might need nursing home or home health care. Maybe she decides to move to a different part of the country to be closer to her grandchildren. Or she could decide that she wants to buy a second home at her favorite vacation spot. Her investment objective could change. Maybe she doesn’t feel comfortable with her money fluctuating and wants to put her money in a CD at the bank. Her income or her tax situation could change so that she no longer needs that kind of investment. But it really doesn’t matter, because now she can’t get more than a small portion of her money for the next 10 years unless she pays thousands and thousands of dollars in penalties! Notice in all of these situations that Sharon is the one who gets stuck paying the penalty. Not the broker or agent that sold it to her and definitely not the insurance company. It makes you wonder who benefits most from these transactions. It obviously isn’t Sharon! None of us knows what tomorrow holds. So it’s important to maintain the flexibility to access YOUR money! Thousands upon thousands of investors have seen the value of their investments drop substantially and because they are in a similar situation to Sharon, they have only limited flexibility to make adjustments to their portfolio. Brokers would have you believe that the whole market is down and there isn’t anything you can do. That’s not true. For instance, certain Real Estate Investment Trusts have provided an attractive level of income without facing the wild fluctuations of the stock market. Portions of the bond market have enjoyed double digit gains in 2002. Besides, there’s no need to pay a big commission or have long surrender penalties. My clients don’t. They pay me a small ongoing fee instead. They get professional advice and access to investments they can’t otherwise get but they keep control. They can access their money whenever they want without surrender penalties. We can quickly adapt and adjust their portfolio based on market conditions and changes in their situation. Learn from Sharon’s mistake. Don’t let yourself be talked into an investment with a hefty commission or a long period of surrender penalties. Don’t put all of your eggs in just one kind of investment basket regardless of how safe it is or how many features it has. And seek the advice of an experienced, professional advisor who gets paid by fees instead of commissions. It’s YOUR money. Don’t let anyone talk you into losing control of it. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

A Sure-Fire Investment

Now is the time to start considering end-of-year returns. It is also time to analyze our investments and decide if changes need to be made. Here is one sure-fire investment that you need to consider as you evaluate your portfolio and calculate your wealth. The returns of the market indexes are an important yardstick when measuring the performance of your portfolio. There is another measure of return that is harder to define but vastly more important. It’s the measure of your wealth. Wealth is a term defined by Madison Avenue as having it all: the luxury car, vacation home, fine furniture, etc. Wall Street defines wealth as being a multi-millionaire with a private helicopter and a Park Avenue address. There’s a different definition of wealth that helps us focus on what is truly important in life. It affects us all, regardless of the size of our bank account. The Bible defines wealth as simply having more than you need. Based on this definition, if you’ve got leftovers in the refrigerator, you’re wealthy! Our founding fathers understood this definition well. Just look at the very first Thanksgiving held nearly 400 years ago. The Pilgrims had fled to the shores of this unsettled land to escape persecution and find the freedom to worship God as they saw fit. Their first year was extremely difficult. Disease wiped out over half of the original colonists. It’s hard to imagine the emotional and physical challenges they faced daily. Yet as they gathered their hard-won harvest in the fall of that first year, they took the time to give thanks to their Creator. I’m not sure I could be so thankful if I watched family and friends die. I’m not sure I would have been thankful while breaking my back just to survive. But they knew that even in the face of hardship and grief, they were blessed. They had more than they needed. The Pilgrims aren’t the only ones who have led thankful lives. More recent generations have struggled through hardship of their own, including two world wars and the Great Depression. Those living in those times knew what it was like to do without. Yet they were thankful for living in the greatest country on earth. How times have changed! The only reason we miss a meal nowadays is because we’re on a diet. Many buy new clothes just to have the latest color or style. The national savings rate is at an all-time low and spending is up. What lessons can we learn from our founding fathers and our grandfathers that will help us achieve a better balance in our own lives? First, we have to stop defining wealth by our quantity of material possessions. It’s an old saying, but there are many things that money can’t buy: love, health, family, and friends. When is the last time you measured the value of those kinds of “assets”? Second, we need to refocus our investments. I don’t mean investments of money, of course, but investments of ourselves: our time, our attention, our love. I’ve been doing just that. Earlier this year, I made the decision to give up my nice office in town and start working from home. This wasn’t done for financial reasons, but from an inner conviction that I needed to spend more quality time with my wife and children. Many children don’t get to spend much time with their grandfather. Often it’s because his time and energy are invested in urgent activities. He is missing the opportunity to leave a legacy that is far more important then money. They are losing a part of their heritage. All of us need a little reminder every now and then to not let the urgent activities of life overshadow the important ones. What better time than Thanksgiving to pause and reflect on our many blessings, while also looking ahead at how we can live more meaningful lives. It’s never too late to invest yourself in those you love. The benefits will last a lifetime. If you’re looking for a sure-fire investment, look no further than family and friends. I can guarantee that the returns on your investment in their lives will far exceed those of the best-ranked mutual fund! Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Reader Exposes Mortgage Mischief

Beware of Option-ARM mortgages. They are heavily promoted, but should rarely be used. I recently received an email that perfectly illustrates how overly zealous mortgage brokers push these dangerous products. Knowing their deceitful tactics will protect you. ‘Carrie’ is from Washington, D.C. She sent me an email because she recognized the dangers of Option-ARMs after reading my recent articles at http://www.guardingyourwealth.com. She and her husband have one and are going to refinance before there rate goes up even further. Carrie and her husband have a home worth $900,000 and owe $340,000 on it. Their credit score is very high and they’d like to get rid of their 5.9% Option-ARM and refinance with a fixed mortgage. Her problems started when she contacted a mortgage broker… Carrie explains: “A zealous mortgage broker tried to get us to refinance into another Option-ARM. My whole purpose in wanting to refinance was to ditch this loan and get into a 30 yr. fixed mortgage before rates really go up, which I assume is a reasonable assumption.” I want to show Mr. Zealous Broker’s reasons because I have heard other readers all across the country tell me the same thing. Carrie continued, “Mr. Zealous Broker's rationale on why we should refinance into another Option-ARM is as follows: 1. Since we have so much equity in our home, we should take an additional cash-out of $100,000 and "invest" that money for the long term. 2. He asserts that we have made a mistake in paying the fully amortized principal and interest option payment each month. Instead, he says we should only make the minimum payment despite the fact that this results in negative amortization. [Negative amortization means the amount owed increases each month!] He says that making the minimum payment each month and taking out the $100,000 to invest is a smart move because we will ‘create wealth’. 3. It is unlikely the value of our house will decline in the future since the Washington, DC metro area housing market has always been fairly stable and strong. 4. Negative amortization is not a problem since we will never pay the house off anyway. The best thing to do is to refinance every 3 years with an Option-ARM at a lower rate. Our decent financial situation allows us to be able to do this. 5. It is not problematic if the interest rates on the Option-ARM rise since the rate on our investments will most likely rise as well. “ Carrie concludes, “I am trying to keep an open mind but I can't help but wonder if a) this guy gets paid more on Option-ARMs, and b) it services his commission to have us refinance our Option-ARM every few years. Also, despite the potential to "create wealth" by investing the cash, I do not wish to have a huge mortgage debt as we approach retirement in 15 - 20 years. Am I missing something? I am no financial genius but something doesn't seem right. I would appreciate your insight since this broker has confused me to the point of needing some financial therapy!” I responded… “Well the doctor is in! First, you are absolutely correct in your take on the situation. This investment philosophy is being heavily promoted by some 'wealth management' strategists because of the commissions it generates. The only thing that surprises me is that Mr. Zealous was only suggesting you take out $100k (why not more?) and that he isn't suggesting you put it into an equity-indexed annuity or equity-indexed life insurance! It is a waste of money to refinance your mortgage every three years. It is also untrue that if mortgage rates increase that the amount on your investments will go up as well! Has he ever heard of a recession? Run from this advisor and anyone else recommending you leverage your home for the potential of a greater return on investments. You are earning 5.9% on the equity in your home right now with zero risk. Refinance into a fixed mortgage or a 10/1 ARM.” Carrie took my advice and is now working with a reputable mortgage broker. Here’s the point—when dealing with your finances and your gut tells you something is wrong, listen! Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

When Your Life Insurance Is A Pot Of Gold

Don’t cancel your life insurance policy without reading this first! Depending on your situation, you may be losing tens of thousands of dollars if you do. If you have a life insurance policy that you no longer can afford or need, consider selling the policy. Read on to find out how. Lots of investors have life insurance. Most people think the only way to collect on a life insurance policy is to die first. But there’s another way to benefit financially from a policy while you’re still alive and kicking. It’s called a life settlement. There are a lot of companies that buy life insurance policies. These companies aren’t buying policies to do you a favor; they buy them as an investment. When they buy a policy, they pay you up front and take over payment of the premiums. The amount they pay will vary on several factors, but usually averages to about 15% of your policy’s face value. You benefit by getting more money out of your policy than if you cancelled it or surrendered it. Not every life insurance policy can be sold. In general, the policy holder usually has to be age 55 or older with a life expectancy between 2 and 12 years. The insurance policy has to be transferable. It must be a universal life, variable universal life, second-to-die or term life policy. Face amounts need to be at least $100,000. Several changes in your life could cause you to consider a life settlement. Estate tax law revisions might mean your heirs no longer face a hefty tax bill at your death. Perhaps your universal life premiums have become too expensive for you, or maybe you no longer have to worry about replacing your income. In these situations, you have several options. You can view your policy as an investment and keep it. You may be able to lower your amount of coverage. You can let it lapse or surrender it for its cash surrender value. But sometimes a life settlement is a better solution. For instance, because of estate tax law changes, a lady in her late eighties no longer needed her universal life insurance policy. She didn’t want to keep paying the premiums on her $600,000 policy. Instead of canceling the policy for the $518 cash surrender value, she sold it instead for $80,000. A recently-retired gentleman had a universal life policy for $1,000,000. He became very ill and was having trouble paying his medical bills. He passed on the $2,128 cash surrender value and collected just over $100,000 through a life settlement instead. This allowed him to pay for the medical care he desperately needed. Keep in mind, though, that these people received far less than if they held the policy until death. For those considering a life settlement, there are a few words of caution. Be aware that the commissions on life settlements can be as high as 33%. These commissions are negotiated between the advisor and the purchasing company, but are not always disclosed to the client. If your state doesn’t require such notification, make sure your advisor clearly states their cut. Have your advisor show you offers from several companies. You will want to know the gross offer, the commission and the net amount you will receive. An advisor may recommend a company based on which pays them more, not you. Beware of advisors who approach you about life settlements. In this case, it’s far better to be the pursuer than the pursued. There is a big difference between selling your policy and buying someone else’s policy as an investment. I don’t believe any small investor should buy someone else’s life insurance policy as an investment. These were sold as ‘viaticals’ over the last several years and many took the bait to their regret. Don’t buy a viatical! Life settlements aren’t for everyone. You need to make sure your life insurance needs are properly met and you’ve carefully considered all the pros and cons before making your decision. But in some circumstances, a life settlement can be a wonderful way to dip into the pot of gold sitting in your life insurance policy. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Afraid of Losing Your Home To Medicaid?

Doris from Minnesota is considering transferring her assets to her son so they won’t be lost to Medicaid should she need assisted-living or nursing home care. Is that the right move? If so, what’s the best way to do it? Read on to find out. One of the greatest financial risks seniors face is the rising cost of healthcare, including the cost of custodial care in an assisted-living facility or nursing home. And seniors are worried about this. They’ve worked hard all their lives to build a nest egg and they shudder at the thought of it being spent on their care instead of going to their children. Some would prefer to have Medicaid (government welfare) pay their nursing home costs so they can leave their assets to their heirs. Medicaid is the government agency that pays nursing home costs for seniors. To qualify, you can only have $2,000 in assets other than your home. (Be warned, the government has the right to sell your home when you die to recoup the amount they spent on your care.) As a result, many seniors consider gifting assets in an attempt to preserve them. It is considered fraud to hide assets or to lie to the government when applying for Medicaid. I do not condone that in any way. Gifting, though, is a viable, legal way to protect your estate, but there are certain rules you must follow. Most people think you can only gift $11,000 per year to someone without having to pay Federal gift taxes. Since Federal gift tax rates start at 41%, you sure want to avoid them! It will take Doris over 10 years if she can only gift $11,000 per year of her estate. But here’s the good news: you can gift over $11,000 each year without having to pay Federal gift taxes! Each person has a lifetime gift-tax credit that results in being able to gift $1,000,000 without any Federal gift taxes. So Doris can gift $100,000 to her son all at once. She just needs to tell the IRS to consider the part over $11,000, or $89,000, as a part of her $1,000,000 lifetime exemption. That’s done by filing Form 709 with her taxes that year. Notice I kept referring to Federal gift taxes. You may still be subject to state gift taxes. For instance, here in Tennessee, there is a 6% tax on gifts over $10,000 per person per year and there isn’t any lifetime exclusion. Be sure to investigate the laws in your state. Just because Doris gifts away all of her assets today, she can’t qualify for Medicaid tomorrow. By law, Medicaid can investigate to see if you gifted away any assets within the three years prior to your application. If so, they will deny you benefits for the number of months those assets would have paid for. Let’s say Doris applies for Medicaid within 3 years of gifting $100,000 to her son. Assuming nursing home care in her area costs $3,000 per month, Medicaid wouldn’t start paying those costs for 33 months! Medicaid figures that the person the money was gifted to will feel obligated to pay the costs until then. Still, it’s better for Doris to gift as much as she can, as soon as she can, so the 3-year clock starts ticking. One concern Doris has about gifting her assets to her son is that he could lose half the amount if he gets divorced. She would like to prevent that if possible. If she trusts her son and wants him to have control over the money but also wants it protected from creditors, future estate taxes and from loss in a divorce, then Doris can gift the assets to a Beneficiary Trust instead. You can find additional information about Beneficiary Trusts at www.guardingyourwealth.com. Beneficiary trusts are expensive to set up and probably shouldn’t be used unless you want to protect several hundreds of thousands of dollars in assets. The bottom line is that there are ways that you can gift large amounts without paying federal gift taxes. This is a legal form of Medicaid planning. It can also be used to reduce the size of taxable estates. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.