Know Your Plan Before You Die…

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Most employees do not know what their Social Security benefits will be.  They don’t know what their 401(k) will provide for them at retirement, nor when they will be out of debt.  Few employers provide disability insurance if you get hurt or sick, so what will happen if you become sick or hurt?  And health insurance is a “can of worms.”  If you are self-employed, and/or running a small company, many more questions exist than there are answers.  What will you do when you die or your spouse does?

Everyone should know what benefits they are going to enjoy, and communicate with a spouse about them at least annually.  Things change so fast that if you think you have benefits and don’t, you can go broke in a single week!  It is not hard to gather all your financial information together and review it.  When you have a question, make the effort to call and get answers. 

To see how this works in the real world, I want to share one of my client’s stories:

The husband passed away suddenly at age 64 and his wife had never worked outside the home.  He had $20,000 of group term life insurance and they had $52,000 savings in a 401(k) account.  Their home was worth $230,000, but they still had $189,000 mortgage.  The wife is in good health and expected to live beyond the average life expectancy for women of 87.  The husband’s funeral cost $15,000.  The wife has the option of accessing Social Security benefits of $1,245 a month, or to wait another three years and get $1,570 a month.

What would you do in this situation?  Their monthly living expenses before the husband passed away had been $4,000 per month. Now there’s no money to live like that. Will the wife have to sell the house since the Social Security income she could take now will basically pay the monthly mortgage and that’s it?  If she does sell, where will she live and what will she live on?

This couple had not talked about early death or how one or the other would live once one of them passed away — there was never this kind of detail discussed, ever. They just went along thinking nothing would change.  But it did change and the woman in this situation is in a really bad place financially.  And it will change for you too.  It is only a matter of time before big changes come to your world.  Get prepared.  Review all your benefits and make decisions today as if one of you has passed away.  Play this game over and over until you feel comfortable that you have your financial situation right.

In my experience, most people die with nothing more than a simple will. Their assets have to be probated in court until they are cleared for distribution.  This can take two years.  The expense of having a judge decide how to divide up assets can drain another $30,000 off your assets.  And in many cases, the surviving spouse still needs an income to live on.  What if health problems arise?  

The best way to start preparing for coming changes is to stop spending any more money until you have a Spending Plan in place and have learned how to track that plan so you can see where you are wasting money. Once you do so you will find a surplus that you can begin saving. Fund your future with this real money, that comes from getting your spending and debt under control. Then make sure you create a living trust. Transfer your assets into the trust and make sure nothing goes to the court to decide. Go to www.easylegalplanning.com and see how simple it is to get organized and match assets with a real plan document.  Don’t delay and become part of the majority that leaves your family out in the cold, unable to help themselves.  The memory of you that will be left will not be good.  To learn more go to www.moneymastery.com or contact me: peter@moneymastery.com.

Why Insurance Premiums Keep Going Up…

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Jeff Atwater is the chief financial officer of the state of Florida.  The numbers and issues he relates in the following letter will teach you why we all have to pay higher and higher insurance premiums. This kind of nonsense is happening all the time, in all the states.  Check out his letter then resolve to be on the look out to help curb this horrible cost.

Dear Friends,

As swirling conversations about rising insurance rates continue in Tallahassee, I’d like to talk with you about one reason for those rises that may not be top of mind:  fraud.

The FBI estimates that the total annual cost of insurance fraud in our country tops $40 billion, and that doesn’t even include health insurance fraud. When you break that number down, it comes out to roughly $500 per family per year in increased premiums.

There are as many types of insurance fraud as there are types of insurance, and crooks seem to always find a way to cheat the system.

Our insurance fraud and arson investigators recently ran across an outrageous case that outlines just how bold some of these criminals can be and just how quickly thousands of dollars can be stolen.

Late last year, a man from Orange County reported that his car, a 2016 Toyota Camry, had been stolen in the state of New York. A terrible ordeal, but it happens and that’s what insurance is for.

Imagine the man’s surprise when just a few months later, his car is found on fire near Orlando. He’d already filed an insurance claim worth $10,000, and when the local fire department asked our arson investigators to look into the cause of the blaze, they quickly became suspicious.

As the story unfolded, the man ultimately confessed that he paid someone $300 to destroy his car and to make sure it was never seen again. Why would anyone do that? Maybe he was tired of making his payments or perhaps he wanted a different car to drive. Whatever the reason, the fact remains: By stealing from his insurance company, he’s causing all of our insurance rates to rise.

Now he faces 20 years in jail, but the reality is that this sort of thing happens frequently.

It happens when people intentionally inflict damage to their homes or when they stage automobile accidents. It happens when employers cheat their way out of paying proper premiums for workers’ compensation. It even happens when people fake injuries to get out of going to work.

Insurance is a business just like any other, and insurance companies can’t afford to absorb $40 billion in fraud without raising prices.

I think we can all agree that no one enjoys paying more for their policies, and we must all do our part to help stop this cost driver.

If you see something that looks suspicious, say something. Our investigators are doing a great job, but they can’t be everywhere all the time. If you think there’s something they should look into, give us a call…

We’ll keep working, and I hope you’ll keep your eyes peeled.

Sincerely,

Jeff Atwater
Chief Financial Officer
State of Florida

Fixed Indexed Annuities Are a Good Tool If You’re Getting Close to Retirement

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When you see an investment report on a 401(k), for example, it most often shows the average rate of return on funds over the last 40 years.  Averages do not show the impact on retirement of periodic drops in value.  Reports give averages over a long-range period of time, but fund managers never want you to focus on the big drops that happen during the shorter periods in between. For example, in 2000 the S&P 500 dipped by -10.14%, then again in 2001 by -13.04%, and then again in 2002 by -23.37%.  That is a total of 46.55% drop in values in three years.  If you took the average gain per year for just those three years it was negative, at -15.5% each year!  So what does that mean to you? Well, if you’ve got a lot of time to make up those losses, then maybe not too much. But it would take eight years at an 8% gain just to get back to where you were three years earlier. If you don’t have 40 years to make up these big dips in the market, then frankly you’re getting bamboozled.

This is a lot of math, but my point is that most people don’t know how to calculate the math.  They just look at a report showing a 40-year average and say, “Not bad.”  Not bad if you have lots of time, but what if you’re getting within 10 years of retirement?

Indexed annuities can be a great way to overcome market dips. When you invest in indexed annuities, you get only the gains and no downs — you are “sharing” the ups but not having to experience the downs.  Don’t know what an indexed annuity is? Contact me for more info: peter@moneymastery.com.

Do not confuse indexed annuities with variable annuities. Variable means you are in the market and must therefore be subject to the full ups and downs. Even if you placed your money in a strong New York Life variable annuity, remember, your money is in the market, not invested in New York Life, so it is subject to market ups and downs. Many people have made the mistake of assuming they were safe because of the financial strength of New York Life. But in my experience variable annuities can experience drops in value and then you still can’t get your money out during a bad drop because annuities aren’t all that liquid.

Now indexed annuities are even less liquid than variable annuities, so there is some disadvantage there. They may not work for you because they are not liquid enough for your needs.  But indexed annuities are guaranteed not to lose money and to share in the increases of the market.  And that’s a good thing.  If you are close to retirement and want a safe rate of return, and no downside risk in the market, these are great tools to use.

As a final note, there is one way to overcome to some degree the liquidity problem with indexed annuities and that’s by “laddering” them. You have probably heard about laddering CD’s and it works the same for indexed annuities. For example with a CD, let’s say you had $100,000 and wanted a good 5-year rate of interest on your safe money. You could split up the $100,000 into five $20,000 CDs.  Schedule each CD to mature one year apart, so $20,000 for a one-year CD until it matures, then place the next $20,000 in a CD that matures in two years, and so forth. Then in one year, the first CD matures, which if you need the money, you take it. But if not, it rolls over into a 5-year CD. In this manner, you have $20,000 maturing each year and in five years you will  have a five-year CD providing a top rate of return. To get the same impact for indexed annuities, you can “ladder” these annuities and provide better liquidity while getting the best possible rate of return.  

Contact me for more information on better ways to fund retirement than just dumping money into a 401(k) and hoping for the best: peter@moneymastery.com.

Why 529 Plans Aren’t the Best Way to Save for College Education

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Here is an explanation of 529 plans to fund college educations  taken from a well-respected college planning firm.  Review this accurate treatment, then allow me to add my perspective:   

Offered by states and some educational institutions, 529 plans let you save up to $14,000 per year for college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.
 
While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.
 
In addition, grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.  Keep in mind, 529 plans are counted as available assets on the FAFSA [Free Application for Federal Student Aid] and can affect eligibility for student aid and loans.

Here are my observations about these plans:

Point 1:  The more money you have in a 529 plan, the more it will diminish the chance of receiving any FAFSA funds that may otherwise be available.  This is free money, or “aid” money.  Most likely your student will  not be eligible for student aid if you hvae a 529 savings plan. All 529 plans are required to be disclosed when applying for aid.

Point 2:  Why not use the proposed 529 savings money to purchase a cash-rich-savings life insurance policy on yourself, so that when your child/grandchild decides to go to college they can use the money from there?  There is no tax on this cash value build up, if structured correctly, and it’s not hard to set up. And if you die before the college money is needed, the death benefit will pay into your living trust a multiple of five to 10 times more than any money you could have saved in a 529 Plan.  So you will have the same  cash available plus no taxes due on growth, AND you will have the enhanced death benefit to pay for a lot more than just one college education — think two, three or four educations!  This is a no brainer

Point 3:  If your child/grandchild does not go to college, then if you have set up a cash-rich-savings life insurance policy instead of putting the money into a 529, you still have all the cash to redirect or you can just leave it inside of your living trust so upon your death it can bless other family members as you choose.  This is also a no brainer.

Point 4:  Why not have the options to pay for rent, food, or other necessities for your college student and not be “required” to pay for only tuition, as the 529 forces? There are many expenses outside tuition and books.  And if your student gets a scholarship, then you won’t be able to use the money inside of the 529 plan anyway.  Things change over time, but 529 plans are rigid.

Point 5:  Although the explanation above notes that the 529 plan money can be used at colleges out of the state, most states do not allow the tax deferral you get on the 529 to be transferred, so this induces the student to attend school in their geographic location and may deter them from applying to a college across country. Rules vary, but why place your money into a restricted environment when it isn’t necessary?

Point 6:  And what if your student wants to attend college outside the country? Unfortunately, the 529 plans don’t provide the tax deferral when a child goes out of the country.

Summary:  I hope you can see nothing but limitation using a 529 plan to pay for a college education.  They sound good and upon comparison can look good, but no one knows what will happen in the future so why even risk so much for such a little tax deferral benefit?  This again is a no-brainer.

For more information about how to structure other college saving options, including a cash-rich-savings life insurance policy, contact me: peter@moneymastery.com.

How to Prepare Financially for 2017

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Goals are helpful but everyone always complains about how hard New Year’s resolutions are to keep.  So what can you do to make the New Year financially successful and ensure that goals you set in January don’t end up on the back burner by February?  Here are some of my thoughts about money and personal organization that can bring a lot of success to your financial life in 2017:

New Year Challenge: During the first month of the year, sit down with your spouse and start the discussion by announcing that you are dead, at least on paper. Then begin asking him or her the following thought-provoking questions and see how many of them they can answer without any prompting from you. This little exercise will reveal just how organized you are financially (oh, and how well you can communicate about such things).

  1. How much life insurance do I have on my life?
  2. Where is the policy?
  3. Who is the agent to call and report my death?
  4. How much debt do I have?
  5. Will you have to sell the house or refinance the mortgage, and how do you find out which you will need to do?
  6. Do I have any savings or safety deposit boxes?
  7. What investments do I have?
  8. Do I have a will or trust?
  9. How long will it take to clear assets and take ownership of the trust
  10. Who is the executor of my estate?
  11. Do I have a burial plot paid for?
  12. Does anyone owe me money, and how can you find out?
  13. Where do I keep my tax returns and who prepares them?
  14. Does Social Security pay a death benefit to you upon my death?
  15. How much will Social Security pay you when I die, and why/when?
  16. What attorney should you use and what will be his/her average costs to settle the estate?
  17. Where will the funeral be held and what will it cost?

Now you may be thinking that some of these questions most couples would know the answer to, together. But you might be surprised by how many spouses stay completely out of the finances and let the other partner handle everything. When their spouse dies, they have no idea what to do or what problems they may have to handle.  Asking these questions gets you both thinking and gives you a chance to review exactly what each partner knows or doesn’t know and what needs to be done to get on top of things financially so BOTH people are taking responsibility for the financial success of the marriage.

I urge yo to take this challenge in the New Year as a catalyst for getting completely and totally organized financially. For more ideas on financial organization, contact me at peter@moneymastery.com. The Money Mastery Master Planner organizational system I use personally and with my clients will totally change your life and help make 2017 the best year ever!

What Will You Do about Money If You Live to Be 100?

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Experts think that any of us living today, who reaches age 65, healthy and vibrant, will easily make it to age 100.  Whoa! That will change things financially, to say the least.  In the “old days,” between 1960 and 1980, people who reached retirement age lived just four to eight years past retirement to about 69 for men, and 72 for women. It wasn’t too big of a stretch to have between five and 10 years of retirement income saved . But consider working 35 years, then retiring for 35 years instead of just 5 to 10.  I read an article in 1983 that said by the year 2000, many people would be retired as long as they worked. At the time I balked at that idea — NO WAY! I thought. But the fact is, those numbers are a reality now and that longer retirement period is presenting some very challenging problems we all need to think about:

  1. How will you afford to live 35 years into retirement? 
  2. Will you need to work more years than you had originally planned, until age 75, for instance? What if you can’t because of poor health?
  3. Will you have to reduce your living costs drastically to make ends meet?
  4. What about inflation? If the inflation rate keeps averaging 5 percent screen-shot-2016-09-16-at-2-31-17-pmper year as it has been doing, living on a fixed income for 35 years is not going to work very well.
  5. People may be living longer, but especially in the United States, where the standard American diet is so poor, you won’t be living to
    a ripe old age in good health. What if you’re one in four people who will require long-term care? This is expensive at between $2,500 and $6,000 per month.
  6. Social Security will be bankrupt in 2034, according to the Social Security Administration’s annual report, so what do you do if you can’t count on even that income in retirement?
  7. If you are one of the many retired persons who is divorced, what will you do to live on just one retirement income instead of two?

The old way of looking at retirement planning may not work for you anymore. Trying to save using a basic 401(k) is passe. It’s time to get creative and look at real estate, life insurance, annuities, and leasable resources as other options for creating a predictable retirement you can’t outlive. I suggest you read the book MONEY, What Financial Experts Will Never Tell You.  Full of case stories and practical, holistic approaches to financial planning and retirement that are easy to apply, this book is a BookCovermust-read. Get it in time for Christmas and give it to your kids as well. They will for sure be living longer than you, in most cases, and will have to be ready for a long retirement period. Why not prepare them for that now?  Get going, as time will keep marching forward. Will you be pleasantly surprised when you reach retirement age, or will you be horrified and shocked at what you have done to yourself financially by not taking things seriously today?

Take Your Debt Payments and Turn Them into Tax-free Retirement Income for Life

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Excuse all the following numbers, but they are necessary to teach the method of how to pay off debts and use those debt payments to build a safe and secure tax-free income at retirement that you cannot outlive. 

Let me establish the basic information first, then I can apply the method:

Doug and Karen Smith are age 40.  Doug purchased a $115,000 whole- life policy with Northwestern Mutual Life Insurance Company 19 years screen-shot-2016-11-28-at-4-50-02-pmago when they got married.

  • The premium was and still is $89 a month.
  • Cash values today total $26,000.
  • They have 4 debts totaling $23,000, not including their home.
  • The average interest rate charge on these debts is 19.6%.
  • The total payment each month for these 4 debts is $604.
  • Doug cannot save 3% of his income to qualify for the employer’s match to his 401(k).
  • Doug and Karen do not have a spending plan and have not been able to  save any extra money.
  • Their desired retirement age is 28 years from today.
  • Doug and Karen have always had to finance their cars, new and  used.

Here’s the action plan for our example couple:

  • Borrow $23,000 from Doug’s whole-life policy and pay off their debts.
  • Doug and Karen will keep making the same payments of $604 (the former debt payment) and $89 (the whole life insurance premium) a month to their life insurance company for the next 28 years, until retirement.
  • Doug and Karen will create a spending plan and hire a personal financial coach for a modest fee to hold them accountable for three  months.  (To sign up for your own personal coaching,  choose the Select Plan from the Money Mastery online site.)

Now, here’s what’s going to happen to Doug and Karen as they follow this plan:

  • The cash values on the life insurance policy will grow to almost $441,000 in 28 years.
  • Doug and Karen can borrow from their cash values over the 28 years to purchase five new cars and pay these loans back to  themselves, never losing any money, except depreciation. Subtracting the negative expense of depreciation of an estimated $15,000 for each of the five cars purchased will leave them with about $363,000 in cash at the end of the 28 years.
  • They will turn on the annual lifetime income from the policy of $30,500 at age 68. There will be no more taxes on growth of the cash values, or on withdrawals during Doug’s lifetime, nor upon death.  I repeat:  No more taxation!

So let’s analyze what all this means for you. The traditional method of managing debt you’re probably using is to keep paying down and Debtborrowing and paying down and borrowing and paying down.  But by using a simple whole life policy to borrow from, you recapture all of these payments.

What about the interest rate you will earn on a whole life investment?  The direct answer is 2 to 4% annually over the lifetime of the person, but to recapture all the debt payments makes the real rate of return over 200%.

If you want more information about how life insurance can be used to get out of all consumer debt quickly and begin saving for a nice retirement, contact me for a no-cost conversation:  peter@moneymastery.com.  I can explain this using your age and debt payment information.  Basically you will be borrowing from yourself. 

By establishing a reserve cash value fund, you accomplish the following:

  • No market risks.
  • No more taxes.
  • If you die too soon, the death benefit completes the cash savings.
  • If you live too long, income continues until death.
  • If you become disabled the insurance company pays  the premiums.

Sounds to good to be true?  There is a cost to this that needs to be addressed.  For you it may be too big of a cost but if you’re smart you won’t see it that way as I have explained how to get help with the following various issues.  Here are the requirements to make this work for you:

  • You will need a financial coach to help you change your spending and borrowing habits (see how to get one at a minimal fee above).
  • You will need to be healthy enough (or young enough) to qualify for and be able to afford the premiums on a whole-life insurance policy.
  • You need to control your spending so you can learn how to save extra surplus each month.
  • You will need to discipline yourself so when you pay off a debt, you won’t turn around and  borrow again. You will need to use the debt payment to deposit into the whole-life policy (this is a where a personal financial coach and the right tools can really be vital).
  • When you do need to borrow again, which you will certainly will, you will need to use the cash values in your own policy to do so.

Note;  If you are not healthy or young enough to do a whole-life policy I suggest you find a family member who is and use them.  You can stay the “owner” and control deposits and withdrawals. You should not put so much money into this cash value account that it will affect taxes.  Your agent and insurance company should guide you with this.

This whole-life policy can be compared to a horse on a cattle ranch.  The purpose of the cattle ranch is to grow the herd and sell off the beef for profit.  But you must have a horse to manage this cattle because they will do things that cattle cannot.  Whole-life insurance properly structured, will do four things for you at the same time: 

  1. Provide a death benefit
  2. Grow your money.
  3. Pay premiums if you become disabled.
  4. Eliminate taxes.

Like a horse on a cattle ranch, a whole-life insurance policy will do things you cannot get your money to accomplish.  For example a mutual fund will not pay you a larger death benefit when you die; your money in the market is subject to losses; your bank will not keep putting in money for your savings if you become disabled; and your 401(k) does not grow without paying taxes upon withdrawal. 

I suggest you read and re-read this article so you can compare with what you are currently doing with your debt payments.  Are you recapturing all of this money to be used for your future?  Are you getting your money to do four things for you at the same time?  Only a properly structured whole-life insurance policy from a dividend-paying company will accomplish this.

What is a 60-20-20 Savings Plan?

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Money Mastery teaches its clients the  importance of spending money properly and savings is just another way that you “spend” that must be done properly. I like to point out to my clients that there is no such thing as savings. What does this mean exactly?  Well, ask yourself this question:  You save money for what?  The minute you answer the “FOR WHAT,” part you have spent your money.  It is still in the bank so you call it savings, but isn’t it already tagged, ear-marked, set aside for spending on something? Yes, so that’s why there is no such thing as savings.  So as Money Mastery Principle 3 states: Savings Is Actually “Delayed Spending.”

So what kind of things do we need surplus money for in order to take care of this “delayed spending?”

  1. Emergencies
  2. Emotional spending
  3. Retirement

Emergency Savings

We all have emergencies; they come along once in a while and surprise shutterstock_224050600each of us.  For example, suppose your car transmission breaks, or your hot-water heater leaks, or you have an illness that keeps you from work for a month.  All these are common things that happen all the time.  Look at your associates and see how much this is happening all around you. It’s only a matter of time before some kind of an emergency hits you.

Emotional Needs

And what about impulse purchasing? Just like an emergency, this is bound to happen to you at some point, so why not be prepared for it just like you would an emergency? So many people end up in far more debt than they need to because they do not set aside money that is used purely for the purpose of fun. If you never spend money for the sheer emotional satisfaction of getting something you really want to buy, then responsibly managing your finances becomes a drudgery. It’s like a diet that never allows you to indulge in a cookie or some ice cream once in a while — you will end up feeling too restricted and therefore not stay on the diet. The same is true for emotional spending. We all need to purchase things for shutterstock_44998930 (800x600)ourselves or loved ones on impulse at times, so it’s best to simply be prepared for this when it happens by having money set aside expressly for this purpose. If you don’t, you will spend money earmarked for debt payments or to pay other bills and this causes big trouble down the line.

Retirement

Of course everyone knows they need to be saving the most money to spend later in life when they have quit working or can no longer work due to health problems. The problem is so many people do not really know how to do this.

The Beauty of the 60-20-20 Savings Plan

The 60-20-20 plan calls for all surplus money to go into these three areas for future spending:

  • 60% for long-term retirement
  • 20% for fun activities that build relationships and ensure you stay on track financially
  •  20% for emergencies.

When a person has money set aside for fun, retirement, and emergencies and an emergency hits then “what is the emergency?”  There isn’t one. And what about when an impulse purchase takes you over momentarily? No problem — you already have money set aside for this specific fun thing so you can spend guilt-free !

How much should you spend into these future accounts?  You should be saving at least 10 percent of your gross income every month for retirement. As for emotional savings, put enough away so that you have money to look forward to a wonderful activity or splurge purchase at least four times a year. In my experience, if you are not having fun very often, life becomes a real drag. As for emergencies, I suggest you review your income and if it is steady and you’ve had no interruptions in pay for the last three years, then save three months of income and be sure it’s liquid, meaning you have it someplace you can get at easily without penalty.  However, if you are self-employed or commission-only, you will need at least six months of income in reserve just to manage properly.

Dream with me for a moment. Let’s suppose you had no consumer debt, with six months of income in the bank. You would not have to be worried at all.  Take this challenge and calculate how much money it will take to get six months income reserved with no consumer debt, then estimate  how many months it will take you to reach this goal. If you want some really easy tools for doing this, I suggest you go here for a low-cost online tool that will help you calculate this quickly and easily.

Where should you keep this money?  This is a big question in terms of retirement money, and I have lots of opinions about that, some of which you can review by reading the following blog posts.  

Here’s How to Plan a Great Retirement

Over the Long Haul the Stock Market Always Goes Up, Right?

Successful Retirement Means You Will Need 8 to 10 Times Your Annual Income

How to Check to See How Good Your Retirement Plan Will Be

Kids’ Snacks and Your Retirement

The Coming Healthcare Crisis for Retirees and What You can Do to Protect Your Retirement Against It

Why You Will Pay More in Taxes at Retirement with a 401(k)

Stop Saving Money Into a 401(k)

Retirement can be funded in so many better ways other than just dumping it into a 401(k) that are so much safer and more predictable that I urge you to contact me for a no-cost conversation: peter@moneymastery.com. These include real estate, life insurance, annuities, and so forth.  As for emergency and emotional savings, I would keep these funds in the form of cash at home in a safe place, in a safety deposit box, or in a savings account that has a debit card attached to it so you can take care of emergencies when they happen.

How to determine if it truly is an emergency?  If it is totally unexpected, it is probably an emergency.  If the need is urgent, like that it needs to be solved today or at the latest in two to three days, it is probably an emergency.  If you cannot move forward without getting the problem resolved, it is definitely an emergency.  Don’t be afraid of using this emergency money, for this is why you have it.  Just know that 80 percent of all people will have an emergency during this year.  For your peace of mind, you must plan for this happening and relax and know you don’t have to worry.  Go to www.moneymastery.com for more help.   

Retirement Crisis is Happening Now Because Most Employers Have Switched from Defining Life-long Pension Benefits to Defining Yearly 401(k) Contributions

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Lack of adequate income at retirement is the next gigantic financial shoe to fall, and it is going to fall hard.   

Consider in 1981 nearly two out of three workers had a quality pension plan, not a 401(k).  Employers would agree to pay 60 percent of the last 25 years’ salary each month for the life of the employee and their spouse.  This was not a “do it yourself” 401(k) like what employers “offer” today.  This was not “everyone is on their own and good luck.”  This was not a “you have to be your own investment adviser.”  It was cash-solid and backed by life insurance companies with guarantees.  

Let me explain a defined contribution plan.   In today’s world, most people have a 401(k) where an employer defines what they can afford to place into your individual tax-deferred account (a 401(k) or 403(b) or 457, etc.) as a percent of your income.  Example:  5 percent of your salary would be saved for you in this tax-deferred plan.  Sometimes you are required to save the same amount or the employer will not contribute anything.  The cost to the employer for doing this plan is just the 5 percent and administration expenses.  If your salary is $60,000, then the employer puts $3,000 each year into the plan.  

Now let me explain the cost of a defined pension plan. This is  where the employer promises to pay, say 60 percent of your income to you at retirement using the top three years of your salary as the average. Plus they will pay this for your lifetime and continue to pay it to your spouse after you die.  Let’s put some numbers to this kind of a plan.  If your salary is $60,000 then you would get paid $36,000 per year for life.  Assuming you live to age 83 and you turn on this pension at age 68, you will receive $540,000 (and let’s not forget, if your spouse continues to live on after you, this $36,000 per year will continue, thus increasing that $540,000 amount possibly).  

How much money will it take your employer to deposit enough in your accountmoney-nest-egg each year to achieve this $36,000/year goal?  Answer:  $7,000 a year, as long as the employer can earn 5 percent on this money.  Let’s say the employer can only get earnings of 2 percent each year?  Then they would be required to deposit into your pension account $10,500 a year.  Don’t miss this point: Under the old pension plans, the employer assumed all the risk!  Even if the funds lost money, the employer had to make up the difference.  This got so expensive employers could not afford to offer pensions anymore and started switching over to defining the annual amount they could put into you account using deferred 401(k)s.

When people retired at age 65 and died at age 69, the employer was in good shape financially.  But think of how long people are living today.  If a couple reaches age 65, they will live well into their 80’s.  No employer can afford to pay this kind of money.  Using my example above, the difference is either $3,000 a year or $10,500.  Which do you think your employer can afford?

The Social Security Administration states that 90 percent of all retired folks are totally dependent upon their Social Security monthly income.  For those retiring right now, that income isn’t half bad, but as more people retire and the system becomes drained, there won’t be much of that income to live on. Therefore, people will have to work longer, even into their late 70’s.  And what about other things that eat into traditional retirement savings programs such as IRAs and 401(k)s, things like fraud, inflation,, out-living income, needing long-term care, market risk, lack of organization, more taxation, not understanding how to get the most out of Social Security, and a host of other problems attending retirement decisions?

What is the answer to the nonsense of the traditional retirement “planning” formula?

To be successful in retirement, a person must think in terms of the following:

First, stop going with the herd and start looking at new options for funding retirement that are a lot less risky than a 401(k).

Second, learn how to control spending so you don’t add any more debts to your load.

Third, learn how to pay off all debt quickly, including your mortgage, in under 10 years. Impossible you say? Not hardly. It is mathematically possible for anyone with five or more debts to eliminate all of them in under 10 years by applying debt Power Down principles.

Fourth, change the way you think about accumulating money for retirement.  A person has to switch from focussing on a rate of return, and start locking down guaranteed income for life.  Most people work and try to save, but want the best return.  How well was that retirement strategy working for those people who were ready to retire in 2008?  When you lose 40 percent of your nest egg because you had it in a 401(k) that was invested in the market, you have to keep working.  If those folks locked down a guaranteed income for life, they would not have lost one penny.

The conclusion to draw here is anyone that has a 401(k) or it’s look-a-like, has to be their own investment adviser.  They have to assume all the risk. They have to be the one in control, but unfortunately, they don’t control what happens in the market. I hope you know that no one else has your best interest at heart.  If you are going to continue playing the defined contributions game it is imperative that you become a savvy and skilled investor, something that takes a lot of time and effort, in addition to working your job and taking care of family. If you would prefer to take a different retirement road, one that does not require that you learn how to play the stock market in order to build a solid financial future, please contact me:  peter@moneymastery.com or visit www.moneymastery.com. There are lots of ways to build wealth on ANY income that do not involve defined contribution plans. Learn about them now!   

The High Cost of Bad Health

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While it is true that the U.S. has one of the highest life expectancies of any country in the world, it’s also true that our quality of life as we age is one of the worst. That’s because even though the average age of death for a U.S. male is 84 and a woman is 87, they will most likely live to that age in poor health and needing long-term care at a nursing or assisted living facility. We live longer here but that’s only due to advanced medical care, not due to the way we eat or take care of ourselves.  In general, the U.S. is at the top of the list for the most obese and unhealthy populations in the world.

Even with that knowledge, we somehow think we will somehow be able to afford the cost of aging so badly. We don’t think twice about insuring our homes and cars, but we never think of insuring ourselves as we age in case we need long-term care.  How does the risk of long-term care compare with other majors risks we always insure against?

Home Fire:  1 out of 1,200 homes

Auto Accident:  1 out of 240 automobiles

Major Medical:  1 out of 15 people

Long-term Care: 1 out of every 4 people!!!

And the cost of getting that long-term care is staggering. The average cost of an assisted living facility is $3,000 per month (and that’s a no-frills facility). The average cost per month for stay in a skilled nursing home is $6,000. You can see how quickly life savings can be drained if one or both spouses needs to go into long-term care. And as you can see from the above statistics, your chances of needing that care are good, unfortunately.

One of the things people do to combat the loss of life savings as they age is to Medicarepurchase a long-term care insurance policy. As Peter pointed out in his last post, premiums for this type of insurance are expensive, usually around $6,000 per year. But, the cost of long-term care is SO MUCH MORE costly, that you can recoup your premiums in less than two years.

Okay, so purchasing long-term care insurance is one way to deal with the high cost of aging, but what about doing more to prevent these ridiculously high expenses yourself in the first place? The reason more people don’t do this is manyfold:

  1. When people are younger they can’t possibly imagine their bodies getting tired and wearing out, so they don’t plan for the future. It isn’t until people hit about age 50 that they realize they aren’t driving a new car anymore. While the “car” isn’t ready to go to the junkyard just yet, it’s still a used car and needs a lot more attention and maintenance than it once did.
  2. The cultural norm in our U.S. society is inactivity and obesity, so eating healthy and staying active take more work, more money, and more effort than they do in other countries where it’s more expected.
  3. We don’t have the cleanest food supply, with genetic food engineering, contaminated and depleted soil, pesticides, and chemical food processing. Let’s face it, it’s much harder to eat healthy in the U.S. than it is in countries where people are still eating raw food directly off the land. While trends are going to more organic, clean food, eating well in the U.S. is still more expensive than eating the standard American crap diet.

Okay, but enough with the excuses. Now on to what can be done to plan better for the future so we can not only be alive in our retirement years, but enjoying that life and having the money to do so. This requires work right now, when you are in your 30s, 40s, and 50s. Once you hit your 60s, the chance of aging well if you have not been eating right or staying active go down exponentially!

So what do experts mean when they say to eat right and be active?

First, the “eating right” definition:  

  • This means 5-7 servings of vegetables (fruit is not included in this) per day, 4 of those servings should be dark green vegetables.
  • Eating balanced meals that include protein, good fats (think Omega 3s not Omega 6s) and complex carbs (meaning whole grains and fruits, not simple carbs such as processed foods and sugar).
  • Eating smaller meals more frequently to avoid over-eating, or keeping portions small if eating only three times a day so you eat only until you are satisfied, not stuffed or even slightly full.
  • Drinking half your body weight in ounces of water. So let’s say you weigh 130 pounds, you should drink 65 ounces of water daily.
  • HamburgerTrying not to eat after the evening meal so you can let your body “fast” for a good 13-16 hours. Studies have found that people who live in countries where they often have to go to bed hungry or on a more empty stomach have better long-term health and tend to live longer. Fasting can be an important key to weight loss and weight maintenance.

Now on to the definition of “being active:”

There are arguments all over the place about what it means to be truly active and how much and what kind of activity you need to age well. So I won’t go into a lot of detail here, except to say that activity that is required to maintain health as you age is not a moderate little walk around the block. That level of activity, let’s be honest, is for those who have not stayed cardiovascularly active throughout their life and are trying to get some form of exercise in now that it is becoming really hard to do it. If you wait until your 60s to start being active, it’s going to be a lot harder to get in shape and stay that way, so don’t wait. Do it now, while you have a chance… a chance to do more than take a little walk around the block. While it is possible for people in their 50s and 60s who have never been active in their life to totally transform their life and get into total shape, the amount of time and effort to do it can be staggering! That’s why it’s important to do the work now, when the body can comply more easily.

What helps cells rebuild the mitochondria that naturally die as we age is 18284longer periods of moderate activity, meaning a three mile walk, if you’re just starting out, a five-mile bike ride, a 40-minute aerobics class of some kind.  Modify it to work for your level of fitness and work up to longer and harder activities such as running a 5k, biking 20 to 50 miles, hiking that more difficult peak, or swimming those 5 miles. It doesn’t matter, but just get moving so you can build up mitochondria and cardiovascular endurance. Be sure to consult a doctor if you have not ever been active or active for a long time to make sure your heart and lungs can handle more than a little walk around the block.

The second way we need to rethink aging well in terms of physical activity is getting body mechanics in order before you lose muscle, skeletal function, and balance that is almost impossible to correct as you get older.  How we move and use muscles in our 30s, 40s, and 50s will determine whether we can even stand up in our 60s, 70s, and 80s. Learn more about the absolute importance of bio-mechanics and how to stabilize and strengthen abdominal and spinal muscles, and how to use the core for balance, strength, and energy.  Take a yoga class (they say if you are not doing yoga after age 40 you are just crumpling in on yourself — yoga builds strength, balance, and flexibility), hire a bio-mechanics motion specialist, learn how to retrain parts of your brain that have been using certain muscle groups in your body incorrectly to alleviate pain, injury, and immobility. The more you move and move properly when you are younger, the better chance you  have of staying active your ENTIRE life.

For more information about how to age well and plan well for retirement visit www.moneymastery.com.