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.

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.

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!

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 ago 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 borrowing 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.

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 account 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!