Incorrect Perception on Variable Annuity

Q: I purchased a variable annuity last year at age 56 from Met Life. I am not feeling great about its performance and the alleged principle guarantee is not what I was led to believe. I am thinking about... taking the max distribution each year avoiding the surrender charge and rolling it back into mutual funds or an indexed annuity. (This was originally ira money.) What do you think ?

A: It's not unusual for the perception that investors have with these kind of products to be considerably different from how the actually work. That's why I work so hard to put the information out there that can help clear up the confusion.

You can transfer money from a variable annuity to another IRA without incurring any tax ramifications. I would seriously recommend avoiding an equity indexed annuity. In my mind it would be like going from the frying pan into the fire!

It sounds like you should better educate yourself on the financial services industry prior to taking any further action. Here's a Special Report I've written that should help:

Financial Self Defense

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Structuring an Apartment Purchase

Q: My wife's parents, who are very kind and generous, would like to contribute $300,000 as a downpayment toward our purchase of a $1 million apartment in New York City. My wife and I would take out a mortgage in our names for the remaining $700,000 and pay the mortgage and the $1,000 per month common charges/real estate taxes.

It is our intention that... my wife's parents would get a complete return on their investment, plus a portion of the profits, when we sell the apartment. Meanwhile, my wife and I would be able to write off the interest on our mortgage and hopefully get a return on the property, rather than continuing to throw money into the bottomless rent pit as we have for the past seven years.

I was hoping you might be able to provide some advice on how best to structure this arrangement so that we pay as little taxes, if any, as possible. Thanks in advance.

A: You can set it up so that they own 30% of it and you own the other 70%.
The deed would need to be tenents in common.

The only problem that I see with that is that the mortgage company wouldn't view the parents contribution as your equity and may want a down payment. That might be able to be taken care of if the parents were to cosign the loan or offer their portion of the condo as collateral.

That way the $300k isn't a gift and they automatically receive 30% of the proceeds of any sale.

Of course, it's worth talking with a CPA and real estate attorney to make sure.

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Reclassifying Cash Assets for College Financing

My oldest of three children will start college next year. Two different college financing specialists have advised me to 'reclassify' my cash assets (about $250k liquid) into equity-index universal life policies so it won't disqualify us from eligibility for federal, state and/or institution financial aid (by reducing the EFC, Estimated Family Contribution).

I'm not convinced that the life policy is a strong investment vehicle. The Non-MEC plans apparently allow you to borrow out accumulations tax-free. The claim is that you never end up paying tax on the earnings. What about at termination and/or death?

Is there a better alternative? I'm suspicious about the recommendations, because I suspect the specialists' primary goal is to earn a commission from sale of insurance policies.

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Investing 10% Withdrawn from Equity Index Fund

I purchased an Equity Index Fund at a Senior meeting seminar! I feel I am stuck with this investment. I am allowed to withdraw 10% once a year. My question is where should I invest this money or can I get it all back without penalty?

This money is my IRA and is tax deferred, but once in my possession am I required to pay tax on it? What are recommendations and ideas?

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Caveats of Annuities

Q: I just finished reading one of your commentaries about the caveats of annuities as I have been talking to a financial adviser and considering one.

I am 43 years old, single female, physician, in practice with a group that offers no retirement plan. What I have accumulated has been through... investments in the stock market and I am also contributing to an IRA (that has a limit to what I can contribute to it)

The annuities have been recommended to me as a tax deferred vehicle as well as a "guaranteed" growth of my investment.

One of the major drawbacks I see is the annual cost of 2.75 to 3.4%, however, after reading your web page I am not sure I will be doing the right thing for the future.

A: The cost is definitely a drawback. There also aren’t the guarantees that you think. You mentioned that there is guaranteed growth. That’s not the case. Here is a link to an article where I deal with that misconception:

Are Variable Annuity Guaranteed Living Benefits Worth It?

Moreover, the main thing that you lack not having a retirement plan is the ability to contribute pre-tax dollars. An annuity doesn’t provide you that benefit. What an annuity does do is allow the earnings to grow tax-deferred, but I don’t feel that’s the benefit the annuity salespeople portray it as. The reason is because when that money is withdrawn down the road you have to pay ordinary income taxes on it. That means you pay income tax just as if it were wages from your job (no social security or medicare). That means you could be paying taxes of 35% on it if you are in a higher bracket. Annuities also cause you to lose access…that money has to remain in an annuity until 59 1/2 or you face automatic IRS penalties.

On the other hand, you can instead invest that money in stocks, bonds, mutual funds, etc. and the dividends and capital gains are taxed at a maximum rate of only 15%. My calculations show that the tax-deferred annuity will never result in more after-tax income if taxed at a higher rate like 35%. On stocks and mutual funds you can write off any losses on investments, you can’t in an annuity.

This is probably money that you want to put away for retirement. That doesn’t do away with the negatives associated with keeping the money in an annuity until 59 1/2. For instance, what if you don’t like annuities or find that they aren’t the investment you thought? With an IRA, you can transfer that money into an IRA at a brokerage account and invest in stocks, mutual funds, CD’s... virtually anything. If you go the annuity route you can only move the money from one annuity to another.

To me, the "benefit" of tax deferral doesn’t outweigh that risk.

In short, I don’t believe an annuity is the best choice.

The more you understand about the financial services the better you will be able to protect yourself. Here’s a link to a Special Report I’ve written that deals with that subject. It also talks about the uncommon strategies and services I provide to common investors.

Financial Self-Defense

Let me know if I can be of further help. I’d be happy to talk to you about the strategies I would recommend in your situation.

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Getting Out of Universal Life

Q: Do you have any advice for my mother who has already bought two universal life insurance policies? Is there anyway she can get out of them and preserve her cash?

A: You can get out of them. You will want to look at the cash surrender value and compare that to how much you put in. That will tell you the ‘penalty’ for surrendering it. If you didn’t put a large up-front payment into it then surrendering it will probably just result in losing most of the premiums you’ve paid. You can compare that to the cost of term insurance to get an idea of how long it would take you to make up the difference.

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Taxes on House Inheritance

I have what I hope is a simple question. My mother passed away this year and I have inherited her house as part of my half of her estate. Will there be any state or federal tax issues due to the transfer of the house from her name to my and my wife's names? There is no mortgage on the house and it was appraised by her estate at $525,000. We plan on staying in this house for a minimum of 10 years.

Any help on this issue would be greatly appreciated.

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Getting Out of MasterDex During Free-Look Period

Q: I hope I didn't change my mind too late.

Just read your information on the Masterdex 10. I had already decided it was not for me before reading your info. An advisor convinced me that this plan was a good thing. Got down to the point that I received the contract packet to review and sign. Then I realized what I would lose if I took the full cash value at 5 or 10 years.

I did not... sign it, and returned it to the Allianz home office in Minnesota with a cover letter saying that after review, I determined that "the plan does not suit my needs and am requesting a full refund as provided for in their 20 day right to examine policy." Did I stop the process in time or do I have a battle ahead?

A: I would call Allianz and make sure that they note that you were surrendering the policy during the free-look period. You may also want to contact the agent in writing (or by email). Be sure to instruct them what to do with the funds.

I want to congratulate you on taking the time to do your research. Regardless of the advisor or product you use, it's important that you be fully informed before making a decision.

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Question About TIPRA

Q: I just read that the TIPRA act states that people in the 10 or 15% tax brackets can sell assets without paying capital gains in 2008. Can this be true?

My 75-year-old mother (good health) is planning on building an in-law suite, which will connect to my house, and she will need to sell securities to come up with the 140K it will cost her.

Without considering assets, she is "low-income", making only... 20K from social security and dividend income (no substantial pension or other benefits), but the asset sale would throw her into another tax bracket for the year (or so I thought), causing her to lose prescription benefits (another issue complicating matters!!).

Any advice/guidance on what to sell (she has several long-held blue chips, mutual funds held for various periods). I'm not sure where to start! Given that people live so long these days, I'd like her money to be invested in such a way that it keeps growing at a decent rate (double digits??).

She also wants to gift some money to my kids for a 529... any thoughts?

I feel like I need to be in a room with a personal advisor, a elder attorney!

A: There are a few different ways to look at this.

First, she wants to put up the money to build onto your home. If her name isn't going to be on the deed (tenents in common with the appropriate % ownership), then the money she would put toward it will be considered a gift.

That gets into some issues with the annual limit of $12k per person per year on gifts. If there aren't state gift tax issues, the Federal gift taxes can be avoided by her filing the correct tax forms.

If it's a gift, then it would affect Medicaid eligibility were she to apply for it within 5 years.

Second, you should talk to a tax person about the tax situation on selling the securities. Since it would be considered capital gains it may not affect her tax bracket and her limited income may mean she only pays 5 or 10% in capital gains tax.

Third, another possibility (if selling the securities causes problems) would be for her to borrow the money to build the addition and to use income/sale of investments each year to cover the payment. There is still the gift/ownership issue with this option.

I hope this helps and I would be happy to review any investments and make suggestions on how her money can continue to work for her.

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Looking for a New Financial Advisor

Q: I am 75 years old, my wife is 70. We are both in reasonably good health.

With Morgan Stanley from 1975 to 1990, I was invested in mutual funds. In 1991 my mutual funds were reduced and stock added. In 2004 I found many of the stocks had lost considerable value, most were tech. stocks. I thought it was the advisors job to... watch serious loss and advise selling.

In disappointment I transferred all to an independent advisor who liquidated all stock. I have $250,000 in an annuity and $200,000 in two separate funds. I now watch closely and on two separate occasions had to suggest he have a look and he ultimately made a change to a different funds.

I have $30,000 withdrawn from the annuity and am in the process of looking for a new advisor whom I would like to assume the responsibility of watching the progress of my investment. How do I find a person like this, or am I asking for something that doesn't exist, or am I asking too much.

A: I don't see how expecting an advisor (that gets paid for helping) to monitor your account and make adjustment is unreasonable.

Your experience is common. Many investors go to an advisor thinking that the advisor is the one managing the money--making the decisions of what to buy and when, monitoring it and taking action when necessary to improve your account or protect you from losses.

They soon find out, though, that they really are just working with a salesperson that sells financial products.

Here is a link to a Special Report that you will find helpful. It will help you know whether or not you even need an advisor, and, if so, what to look for in the one that's right for you.

Financial Self Defense

Let me know if I can be of further help.

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Thanks

Q: Jeffrey,

It is absolutely horrible that several so-called financial persons are pushing variable annuities on uninformed people. A financial advisor that was recommended to me did his best to convince me to invest my 403(b) into a variable annuity with guaranteed benefits.

Having worked many years with medical product salespersons I knew not to take the word or advice of a... salesperson even when disguised as a "financial advisor" who wanted to help me manage my "hard" earned money.

Therefore I started my research which later led me to telephone you and led to the receipt of your report regarding variable annuities.

My heart breaks for those people who have been tricked into variable annuities.

Thank you so much for all you do to educate people.

A: You’re welcome.

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Advice on Investing in a Variable Annuity?

I am 67, retired, drawing Social Security of $800 month which is adequate. Cashed in my 401(k) of $14,000 but now need to place it in an IRA somewhere within the next 30 days. I was advised by a Financial Planner of a local bank to put it into a variable annuity, but I am not sure after reading all the pros and cons. Any advice?

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Suggested My Children Buy Me Life Insurance

Q: I am 63 years old at poverty level income.

I returned to college on financial aid. I will stay in college until I get my Masters and (hopefully) my Ph.d, which will take a very long time.

For years, off and on, I suggested to my children to purchase a good size life insurance policy for me so they have something for themselves when I die. They have not.

I figured if... the three of them contributed to a hefty life insurance policy, like your article said,--this money would pass directly to them via contract and then they would have an inheritance--"presto".

Is this still a good idea at my age? I wonder if anyone would insure me? I am not obese, healthy, do not smoke or drink but know that something could "go" any minute at this age in spite of doing all the right things

Should I continue pushing for this life insurance thing?

A: They have to weigh the cost versus the benefits. Let’s say that they took out a life insurance policy on you. It’s possible that they could pay premiums for 20 years or more before collecting the death benefit. That means they will have to continue to come up with a payment every year until then and they may not be able to afford it.

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Advice on Equity Indexed Universal Life Insurance Needed

My husband and I need your help. Should we buy into an Equity Index Universal Life Insurance policy?

We are 35-40 with 2 young children (10 & 2 yrs old) with small life insurance polices via our jobs.

We met someone from talk radio that presented himself as a financial adviser but after weeding through all of the fast talk we realize that he is an... insurance agent from the school of Douglas R. Andrew - Missed Fortune 101.

He convinced us to take the equity out of our home ($70,000) to fund a $120,000 EIUL (after clearing debt) for $786,000 death benefit. Of course, he sold us on the tax-free benefits and the withdrawal benefits, etc. We have not purchased the EIUL yet. Before doing so I've been doing more research on EIULs and want to hear an independent neutral voice on EIULs. I don't like all of the fees and commissions attached to the EIUL and the fee to take a withdrawal, etc.

PLEASE HELP!!!! At this point, with the equity we've taken out of our home, could we do much better by buying term policies on each of us with some form of a cash value life insurance policy, or skip the cash value life insurance policy? We need disability insurance and invest the money where? Max 401k (employer match); ROTH IRA, mutual funds????

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Thoughts on the MasterDex 5?

Q: Hello Jeff. I have an independent agent who says I can do better with my money, which is sitting in a 403(b) account earning 12% this past year. Because of market fluctuations he feels that I should put my funds in a MasterDex 5 plan. He is adamant that I can do better. I am not very comfortable with this as most articles that I've read about equity indexed annuities have not been favorable.

I am 63 years young and have been retired for the past 3 years. My wife and I own a home with a mortgage.

What are your thoughts about... the MasterDex 5 plan, or any EIA's. I have read the report on MasterDex 10.

A: Let me understand this.

You have the money in a 403b where you can make changes to it and/or access it any time you want. The fees in your 403b are probably reasonable.

The returns are good.

It may be that you want to take steps to try to reduce the risk of loss in a bad market, but I personally don't think that EIAs are the route to take.

I wonder why the agent is so adamant?

Be careful, very careful.

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Diversify More?

Q: I just discovered this website and was wondering if I could pose a question to you regarding my investments and financial situation in general.

I would really appreciate getting an objective opinion on the way I have dealt with my financial situation after becoming a widow at 71 last year.

A: Sure. If you want to send me an email with the information I would need to answer your questions, I’ll be happy to help…there’s no cost.

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You Saved Me!

Q: Your report on Equity Indexed Annuities just saved me from a very large head ache! I was thinking of doing just that, in fact I was in the process of doing just that when I read your e-mail on the subject!

Here I am at age 66 and this is my first time on the internet!

I have about $500,000 in the stock market and I was going to get out of the stock market and... go into Indexed Annuities to protect my money because my wife is starting to get the first sign of memory loss (a nicer way of putting it).

Thanks Again

A: I’m glad I could be of help. It’s important that investors understand the financial services industry and how it works. I find that often people go to an advisor with a perception about what advisors do that is considerably different from reality. The next step is for you to determine whether or not you even need an advisor and, if so, what you should look for in one. This Special Report should help:

Financial Self Defense

I’d be happy to talk with you about you situation further.

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How to Invest if You Know Nothing About Investing

Q: I'll try to make my story as short as possible and go right to the question.

My husband and I sold a house, we had about $250,000 then, that was about two years ago. We paid all our debt, and now are debt free, but also spent most of our money. We now have about 40,000 left in the bank and I know that if we don't invest in something quick it will be gone sooner than I think.

We know nothing about stocks, funds, bonds etc... investing in that would be like jumping in a pool without knowing how to swim. Honestly I just don't get it. I don't have the smarts for that. One thing we have is a retirement plan from my husband's work. I don't work, I'm a stay at home mom. I was thinking to contact a financial advisor in the area but I came across your website and here I am looking for advice.

What I would like is to multiply the little bit of money we have now, make it grow a whole lot, the smart way. I just don't know how. What advice can you give us?

A: It sounds like you need to share it with someone and there is a great deal of anonymity this way. The problem is that you really shouldn't invest that money. An investment should have at least a 3-5 year time frame. It doesn't sound like you have that since this money is being tapped.

If this money is invested and then you need it, you increase the chances of losing money instead of gaining.

I would recommend that you don't worry about trying to find an investment and instead put this money into a high interest bearing money market account. Personally, I use an online bank that allows me to easily transfer money back and forth from my checking account.

The main objective is for you to work on either increasing your household income or to reduce your expenses. Unless you are able to live on less than you make there is little chance of improving your financial situation.

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Not All Agents are Bad People

Q: I'm not going to beat around like you did in your 60 page report. You probably could of summed it up in 10 and got your point across.

Jeff, you said some hard facts about the MasterDex 10. However, the facts about the product itself are... mostly true. You also said a lot about the guys who sell these hell investments. Guys that care about nothing but how much they get paid after finalizing a deal. Obviously, there are people like that who work for Allianz. (They're going through a suit as we speak.)

You make it sound as if every agent that approaches a prospect is only trying to make a sale, screwing that person over in the long run. I haven't been in this business long at all, but when I changed majors and started doing this, I planned on helping people...guess that's my nature. According to you however, my nature is to not care about any senior, and to only make a quick buck off of them.

Obviously, the money is good in this business, but not every person is in it for that reason. Why are you in the business Jeff?

I've sold a couple of Masterdex 10, I feel its one of the best products in the world (for the right person). I also feel Allianz is a great company. It's not the products you should be spending your time whinning about... its the agents who sell those products to people who don't need them.

I can honestly say that every MasterDex 10 I've sold, the client knew (because I stressed it) they may never see this money again. The people I sold it to have been guys that have plenty of liquid assets, and just want to fight off inflation, so they can leave their family plenty of money. And yes, the money passes to the beneficiaries penalty free.

I wrote this to you because I've taken offense to how you stereotyped me in with all the greedy agents who just try to make sales. Now, if I approach anyone whom has read your report, they will instantly do the same... thank you very much.

Just wondering, this all isn't a marketing strategy, is it? Feel free to reply.

A: I appreciate your comments but respectfully disagree. I wasn’t trying to paint agents in that light. Instead, I was trying to address the misunderstanding that many investors have about this product so that they can make an informed decision.

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Getting Money Off the College Radar

Q: Hi Jeff,

I am a widow with two daughters 18 &16. We are in the college process right now and I contacted a college counselor to help me with the CSS Profile and the Fafsa. She told me that I need to move some money off the radar and suggested first a Roth IRA but then suggested an annuity which turned out to be Allianz Master Dex.

We are not talking very much money at all. It is now in a CD. In two years I will have both girls in college. I want be able to know that money will be there when I get older. I am 53.

Apparently the colleges will go after this money when they look at financial aid so it needs to get off the radar.

I have a meeting with her next week where I am suppose to bring a check. I really do not know what to do. Please advise.

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Cost Basis for Capital Gains

Q: Hi Jeff:

I read your article and it triggered another question - Over the past five years, my folks have given securities to their grandchildren as Christmas presents although they were outside of a 529B plan. Let's say the kids now want to sell these stocks.

For tax purposes, will the dates that these assets were purchased and the cost basis refer back to when my father bought these years ago or will the kids use the date and cost basis value relating to the day they were received from Grandpa? This could have a significant difference in the capital gains.

A: They would be responsible for capital gains taxes based on the grandfather's cost basis.

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College 529 Plan

Q: I was reading an interesting article on capital gains and 529 plans on your web site. However, I still am a bit confused.

I've recently sold my rental property and would like to put all the profit I have made from this sale into a college 529 plan.

This is what I intended to do when I originally purchased the property. But most importantly want to avoid the capital gains taxed on the investment. Is this possible to do? Could you explain or direct to the proper procedure in doing so? Thanks, your help is greatly appreciated.

A: If you want to take the proceeds of the property and put it in a 529 plan then you will be taxed on the gains of the property sale. The only way to avoid those taxes is to move that money into other property through a Like-Kind Exchange.

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Tapping Into Home Equity

Q: So Jeff, if you don't recommend using a portion of your home equity for investment purposes, how do you tap into all that money tied up in your home without jepordizing it?

I plan on retiring from my day job hopefully in the next five years. I have a small nest egg and I have just recently started investing in the Market on my own. I work for the state and have Public Employee Retirement Portfolio. I want to be set within the next five years. What more can I do?

A: The question of using home equity to fund investments really boils down to... risk. The books that suggest using the equity to invest in life insurance make it sound like a low-risk proposition. I don't believe it is.

In your situation, it sounds like you may be comfortable with risk and taking a higher level of risk may be the only way you can reach your goal in five years. Of course, the greater the risk, the lower the probability of meeting that goal.

The instruments you use may also impact your need to tap the equity. Options can be used because of their internal leverage. Regardless of how you invest, it's vital that you have a program and/or strategy that helps guide you decisions.

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Tax Deferral and Variable Annuities

Q: I read your article regarding low cost variable annuities. I think your article was targeted towards a person that is 40-50 years old. I am 25. I think that over the next 35 years that the tax deferral will actually outweigh capital gains and dividend taxes. I didn't crunch the numbers, just a gut feeling.

Here's another question. If I invest in a mutual fund, will they pass through the capital gains and dividend taxes, or will it be taxed as ordinary income? I'm thinking that I have to invest in the actual stocks to get the advantages of the lower taxes.

A: The last time I ran the numbers it wasn't even close. I couldn't find any situation (from a tax point of view) in which it was better to have the deferral of an annuity and then pay ordinary income taxes versus investing such that it was taxed yearly at capital gains rates.

Whether a mutual fund qualifies for the dividend/capital gains rate depends on what it invests in. So if the underlying instrument would qualify for dividends or capital gains, then that part of your mutual fund holding does to.

Thanks for the questions.

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Cashing in a CD--Good Idea?

Q: My elderly mother would like to cash in an $80,000 CD and divide the money between the 4 children. Is this a good idea? How does it effect the children?

A: The federal annual limit is $12,000 so if she wants to do that she might consider doing part before 12/31 and then the rest after so it's spread across two years.

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Bank Bankrupcy--Effect on CDs

Q: When a a big lending firm like Countywide Bank (through rumors) might file for bankruptcy because people are not paying their house mortgages. If they file for bankruptcy would that have any effect on CD's that they handle. Do you have any good rates on 6 to 9 months CD's? $40,000.00 worth.

A: There is a difference between Countrywide the mortgage company and Countrywide the bank. The CDs at the bank are FDIC insured which means that they are protected in the event the bank fails up to the Federal limit.

You should be able to do a Google search and find CD rates. I also believe that the Wall Street Journal and other publications regularly publish the banks paying the most on CDs.

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Investing 401(k) Money for Income

Q: I am about to retire, I am 75 years old and have 350,000 in my 401(k) plan.

I need to invest this money somewhere to have an income for my life,

What are my best options please?

A: You should be able to earn 5-6% on a conservative, diversified portfolio. There are other issues that have to be taken into account as well. For instance, how would inflation... of 5-10% a year affect your wealth and your income? So it's important that any advisor that you use have strategies in place that will protect you from those risks while seeking to keep volatility at a minimum.

For instance, I would tend to utilize strategies that focus on companies that have a record of consistently paying and increasing their dividends. I have several strategies that include companies that pay dividends of 6-10%. I would also want to protect you from a falling dollar, so would recommend a portion of the money be invested outside the U.S. I also like energy. The amounts you would have in some of those areas, though, should be kept fairly small.

Let me know if I can be of further help.

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Should Retired Seniors Carry a Mortgage?

Q: Hello, my question for you is, as a retired senior, is it better to be mortgage free or carry a mortgage and if I am purchasing a new home, and have a current, mortgage free, home to sell, would it make sense to get an interest only loan on the new home until I can sell the existing home?

A: Great question. There are a few things to keep in mind. First, if you take a mortgage... there are going to be several thousand dollars in fees. Then you would be paying interest on that money.

Second, you have to look at what you are currently earning on that money where it's currently at. Are you earning that much more interest that it would be enough to cover all the fees?

Third, you don't know how long it will take to sell your existing home. It's possible that it could sell within 6 months. If that's the case, the fees associated with the mortgage would probably equal several thousand dollars a month.

Lastly, there may be other ways to do it that don't require a traditional mortgage. For instance, I have a client that is in a similar situation. Instead of taking a short-term bridge loan with it's fees and high interest, we are borrowing against his investment portfolio---using margin. The interest rate he pays is considerably less than he would on a bank-type loan and there aren't any fees or time constraints. It allows him to maintain complete flexibility.

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Efficient Market Theory

Q: How do you feel about the accuracy of the Efficient Market Theory? I've been reading some fascinating material from the company Eugene Fama is associated with, DFA.

A: I’m familiar with DFA and they seem to have good performance.

Unlike them, though, I don’t believe that it’s the only way to invest. For instance, look at... American Funds. The AF approach is diametrically opposed to the DFA approach. Is one right and the other wrong? No. They are just different strategies.

Different strategies work better/worse in different markets. I view my job as employing multiple strategies in an account based on the part of the business cycle I believe we are in.

A: Do you remember what happened to the stock market between 2000 and 2002?

If you're like most investors, it's a time you would like to forget!

You may have seen losses of 30%, 40%, even 50% or more. It takes years to recover from those kinds of losses.

No one wants to go through that again.

But here's the question: What are you doing differently now from what you were doing then?

What systems or strategies do you have in place to prevent those kinds of losses from happening again?


The reason that people lost so much money during those years wasn't because of the type of investments they had (stocks, bonds, mutual funds), but because of the type of advisor and the strategies being used.

Probably 98% of advisors follow the Buy and Hold strategy.

Buy and Hold is a wonderful strategy for markets like those we had in 1998 and 1999. But that same strategy is devastating in bear markets like 2000 - 2002.

Did your advisor just tell you to 'hang in there'?

Are you still using that same advisor? Or another one that will do the same thing?

If so, then you should be concerned. Very concerned.

But it doesn't have to be that way.

It takes a lot of hard work, time and effort to manage a client's money. Most advisors don't do what it takes because they are more focused on getting new clients than satisfying their existing ones.

I believe that it's important to diversify a portfolio between cash, bonds, real estate and equities. But it is JUST AS IMPORTANT to diversify a portfolio by strategy. Just as it's wrong to put 100% of your money in a single investment, it's wrong to put 100% of your money at risk by using a single strategy.

That's why I correctly diversify a portfolio--by country, by size of company, by type of business, by type of investment AND BY STRATEGY. I use multiple strategies in my client's accounts. And I adjust the strategies used based on market and economic conditions.

We all know that there's no such thing as a perfect investment or a perfect strategy.

I serve as the personal, private money manager to my clients. I utilize proprietary and hard-to-find strategies designed to let them get the most from the good times--strategies you won't find at your typical advisor. Moreover, I have spent the last 4 years and almost $100,000 developing and perfecting sophisticated technology that monitors each market-based investment in every client's account EVERY 5 SECONDS.

My clients accounts receive multiple levels of protection. Wouldn't you feel more comfortable if your accounts did to?

They can be.

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Looking to Start a New Life Insurance Policy

Q: I have a dilemma, I am starting a new position the first of the year and my current position pays for my life insurance. I am looking to start a new policy and I do not know what to do. Of course, my agent Metropolitan Life wants me to get a Whole Life policy (same as my husband has). My husband pays $167.00 per month for a $75,000 policy (he also smokes).

I was just reading your articles and I think you are correct, I had no idea about the commission these guys make. I am 41 years old, in perfect health and do not smoke. We also do not have any children.

What do you suggest?

A: If you only expect to keep the insurance until you retire then I don't see a need for whole life and it's extra cost. Instead you can look at 20-30 year term insurance. If you are concerned about becoming uninsurable you can buy term that is convertible to whole life.

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Should My Home Equity Be Working for Me?

Q: Hi Jeff, I have been considering using a portion of the equity in my home and investing in managed growth funds that have been averaging over the the last ten years 12%+. I have a current rate of 6.25% on my mortgage. I'm still working and bring in enough income to pay my mortgage now, but I would like to retire within the next 5 years.

I have heard of "Equity Stripping", and "Equity Repositioning" and have long thought the equity in your home should be working for you instead of sitting idle earning 0%. If the funds are managed properly and watched carefully, wouldn't this be a smart way of liquifying your assets if needed? What are your thoughts?

A: I am not a big fan of this for several reasons...

First, this is basically arbitrage. You are borrowing money at one rate, paying interest on it and hoping to earn more than that by investing it in something else. Your borrowing rate would probably be 6.25% or higher. The higher the rate the more difficult arbitrage is to do.

Also, those most successful at arbitrage are ones that are able to lock in the transactions from the start, so they know exactly what the result is. For instance, arbitrage is done between the underlying stocks that make up certain ETFs and the ETF. Utilizing computerized trading, arbs invest large amounts of money to make a small amount but they doing it many, many times.

In your plan, you have no way of knowing what you will earn. It doesn't matter what a fund has averaged in the last ten years, there's no guarantee it will do that in the next 10 years. If it was that simple, everyone would be investing in those funds. For instance, Clipper is a mutual fund that had outstanding long-term records. By all accounts it should have done great. Then it was sold to a larger mutual fund company and it's performance changed.

So there is a lot more risk doing this than you think. A LOT more.

Second, you mentioned that you are still working to bring in enough to pay your mortgage now. That sounds like it's a stretch to pay your current mortgage (unless I'm misunderstanding you). That increases the risk even further because you probably don't have enough income to cover the additional payment on the equity you pull out and invest. That means you would have to take from the investment each month. Doing so reduces the probability of success.

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How Do I Check Your Credentials?

Q: Jeff, you certainly sound like the very best. How does one check you out? Do you have references? Everything on the internet about you, comes from you. I hope this doesn't offend you in any way. I've heard and seen so much lately from several different sources, that I'm really confused. I need a CFP that I feel safe and confident with. One I can trust.

A: I'm not offended at all. In fact, I think you should check out anyone that you work with.

First, you can go to www.finra.org. This is what used to be the NASD site. There you can check out a broker or advisor and see if there are any disciplinary actions. Since my firm is a registered investment advisor, you can check me out here:

http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_OrgSearch.aspx

The CRD number is 123835.

In most states, you don't have to be licensed with the state until you have over 5 clients in that state. You'll see the states in which I am currently registered. I have clients in many states across the country.

Currently I am a state-registered advisor. Once a firm's assets reach a certain level they are required to become an SEC registered firm. That is done in January of each year and my firm will be registering with the SEC then.


If someone is a Certified Financial Planner, you can verify it at:

www.cfp.net

From there you can search for a planner. Enter my last name 'voudrie' and select Tennessee for the state and it will pull up my information. Here's a link to the search page:

http://www.cfp.net/search/


Lastly, and perhaps most importantly, I provide a list of client references. This allows prospective clients to contact existing clients and learn what their experience has been like. Moreover, I provide a many, not just 2 or 3.

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My Broker Wants Me to Get Into VAs

Q: My broker is trying very hard to get my husband and myself into Guaranteed Minimum Income Variable Annuities. I am 65 and my husband is 70.

I just read the article on the internet you wrote about GMWB and have a couple of questions...

First, you are concerned as it normally takes 10 years before you can start withdrawing the guaranteed amount. The variable annuity my broker wants us to get into (AXA Equitable, Guaranteed Minimum Income Benefit) says we only have to wait for 1 year. Another concern you have is with the death benefit the charges could be as much as 3.5%. This one is supposed to be 1.6% cost per year with our guaranteed minimum withdrawal of 6.5%.

Our stock broker says we have to stay in for 4 years, otherwise there is a $5,000 withdrawal fee. He feels we cannot lose as we will get the income, but if one or both of us die, the original principle is guaranteed.

Please give me your advise on this. We will need our money in a year or so to subsidize our living expenses.

A: Here is an answer where I address the guaranteed income benefit:

Underperforming IRA

The bottom line, though, shouldn't be whether you will get your money back. The risk of getting your money back over a 15 year or so period without the guarantee is very small.

Moreover, the expenses are much higher than other alternatives. The 1.65% that you were told about doesn't include all of the expenses. That's the fee (called M&E) for the annuity. That doesn't include the fee that the people managing the money get. The management fees on the sub-accounts will usually be 1% or more. It's not unusual to see fees of 1.5% a year.

So the fees on this annuity are 3% or so. 1.6% for the M&E and 1-1.5% for the sub-acccount management.

Let me know if I can be of further help.

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Too Late to Change My Mind About a Lump Sum?

Q: Just read your articles on universal life insurance. Unfortunately, I bought a $200,000 policy for $290/month to "insure" my Kansas Public Employees Retirement System retirement fund. I elected to receive monthly payments for the remainder of my life. The insurance agent recommended this to "insure" that if I die, my spouse would be able to collect "something" from my policy.

Is it too late to go back and take a lump sum? Should I drop the universal life and buy term instead? I am 56 years old, female, and in good health, good weight, etc., and am now working full time as a college professor.

A: You would need to talk to the pension provider to see if you can change your mind and take the lump sum.

As far as the use of life insurance for those with a pension, it is common. For instance, when deciding the payment amount, look at the payment based on a single life expectancy and then one based on payment for life of both you and your spouse. If a life insurance policy can be purchased that provides guaranteed benefits where the premium won't change, and that premium is less than the difference, then it can be a valid strategy to use.

In most cases, though, I tend to lean toward taking a lump sum instead of the pension.

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Handsoff Alternatives to Annuities?

Q: Hello Jeff. Thanks for the free financial advice offering in your December letter on annuities. It was a good article.

In March 2008 I will be 50 and plan on using my 401K to finance my retirement via 72t. My goal is to not have to manage my money nor worry about stock market swings. My Morgan Stanley adviser recommends an AXA Equitable variable-type annuity. In general I will have about $730,000 to invest. The principle will be managed/traded by him, costing me about 3.5% annually. If the principle goes up I make a profit. If it goes down I don't. However, the annuity is supposed to guarantee me a lifetime annual earnings of 6.5% even if the principle goes to $0.

Although expensive, the 6.5% seems very attractive. But I have not seen any other alternatives that would give me peace of mind. Either I manage my own mutual funds or I have a brokerage do so for me. I still bear the market risk.

What is your opinion ? Can you recommend anything ?


A: Thanks for asking. I think you'll be glad you did.

You are considering the VA not because of it's investment features, but because of the peace of mind associated with the 6.5% guarantee. In return for that you are paying 3.5% a year.

The problem is that you may not have been told the entire story. For instance, you may believe that 10 years down the road you can withdraw whatever is left of the compounded 6.5% guaranteed return even if the market collapsed.

You can't.

The only way that the 6.5% guarantee ever comes into play is as an income stream taken for life. So let's say you start that income stream at age 60 and at age 70 you need to cash out the annuity.

Guess what? You don't get what's left of the 6.5% guarantee less withdrawals, you get what's left of the ACTUAL performance less withdrawals.

The chances of you having that annuity for the rest of your life are probably about the same as you getting hit by lightening or winning the lottery. And all along the way you've sacrificed 3.5% a year in fees.

Yes, I do think there is a better way!

Here's a Special Report that will help you understand the financial services industry better, get an idea of whether or not you even need an advisor and, if so, what you should look for in one.

http://www.guardingyourwealth.com/SpecialReports/FinancialSelfDefense.ht m


Also, my weekly article last week was about these VA guarantees. You can read it here:

http://www.guardingyourwealth.com/blog.htm


Feel free to get in contact with me after you've read it and we can talk further.

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Protecting My Mothers Assets

Q: My Mom is fast approaching Medicaid time.

She owns a 300 thousand dollar house, property valued at around 60,00 dollars, timeshare valued at around 21 thousand, has 40 thousand dollars in her 401k. She has been in and out of Hospitals for 10 years, I think she is on Social Security disability, and has Air Force health insurance from my Dad.

What can we do to protect her assets? How can we buy the house and property or have her gift her property to us kids? There are 4 of us kids.

A: There are several things to look at. You mentioned that she has been in and out of hospitals for 10-years. It would be worth checking to see if should could qualify for... Long Term Care insurance because it's the best way to protect assets, in my opinion.

In order for someone to qualify for Medicaid they have to be impovershed. Medicaid is welfare. That means that she won't qualify until she has $2,000 or less in assets.

Since she has more than that, she will need to use those assets to cover the cost of her care. She can gift assets away, but she will be denied coverage for Medicaid if she applies for it within 5 years of having made the gift.

The reasoning is that Medicaid is a taxpayer funded program designed as a safety net. In the past, people would try to give away their assets so that they appeared impoverished. That's way the look-back period was created. It used to be 3 years, now it's 5 years.

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