Is this a portent of things to come?

"We the people" is often used when we talk about liberty and justice for all.  It is not a phrase used very often when we talk about things that are not so noble, such as deficit spending.  When we talk about deficit spending, we use "the government" as if somehow we can separate and/or distance ourselves from the responsibility.  Well "we the people" had a budget of $3.7 trillion dollars in 2015.  Do you have any idea where most of the money went?  I am going to switch from "we the people" to "the government" below, notice how it seems to lessen the seriousness of it all.

The budget that "we the people" had in 2015 can be broken down into 3 broad categories; Discretional spending, Mandatory Spending, and interest.  I am not going to go into a long civics lesson here, but there was something significant that happened in 2015.

For the first time in history, the United States government spent more on health care than it did on Social Security.  Up until 2015, social security had been the largest single budget item.  In 2015 the government spent $936 billion on health care while it only spent $882 billion on social security.  This is according the a recent report issued by the congressional budget office.

Why is this so important?  The significance is revealed when you realize that when compared to 2014, the expenditures on health care which included, Medicare, Medicaid, the Children’s Health Insurance Program, and Affordable Care Act subsidies was 13% higher in 2015.  At a 13% annual increase, the cost of health care will double every 5.5 years.  Put a different way, spending on health care will consume the entire US budget somewhere between 2026 and 2031.  That is only 10-15 years away. 

 

 

With this as a back drop, I want to ask you a few questions.

1)  Will the government renege on some of it promises?

2) Where will the government get the money to make sure the answer to question 1 is a "no?"

3) Do you think congress will raise taxes to avoid a "yes" answer to question #1?

4) What is the best way to protect your hard earned money from higher taxation?

5) Is there a way to make sure you and your family will be able to afford quality health care?

6) Will benefits be decreased in such a way to make it appear the answer to #1 is still a "no?"

7) Is there a way to position yourself to not only survive this coming storm, but to profit from it?

Who will be able to afford health insurance?

The news is here, premiums for the lowest health plan will have premium increases on average of about 10 percent or more with many in the upper teens and some in the 20 and even 30 percent range.

The average deductible for these plans will increase to $5,653.00 per year.  That means that with deductibles and the premiums families will still pay $10,000.00 per year or more before they receive one cent of coverage.

How many families in America do you think can afford that?  Can you afford that?

The silver plan which is the second lowest costing plan will see average increases of 7.5 percent. In some areas the deductibles for silver plans are increasing to bronze level deductibles in order to keep the increases in what the government calls the range of reasonable.

Doing some simple math using the rule of 72; At this rate, health care costs will be doubling every 6 to 10 years depending on what area of the country you live in. If you do the math, these costs will be astronomical. Would the work unsustainable be appropriate here?

Once again, many Americas are forced to consider going forward without coverage at all. That is a frightening thought.

Tell me how are your children and grandchildren going to afford any healthcare much less access to quality health care? If you could do something to help your family WITHOUT putting yourself in jeopardy would that be worth looking into? Wouldn't you like to make a substantial difference in the lives of your children and grandchildren? Would setting money aside to pay for health insurance and health care be worthy of that money?

The time has come for you to consider the future and how to best prepare for it.

Rent Term, Let it Lapse and Squander the Rest.

For decades, the rallying cry of the financial advice industry has been for clients to buy inexpensive term life insurance rather than more expensive whole life insurance and invest the premium savings on their own. The only problem is most clients never execute the second part of the equation, leaving many of them uninsured in later life and unprepared for retirement.

Just how unprepared are they?  A recent study by the Government Accountability Office looked into the question and the answer is sobering.  The study found that in households with members 55 and older, nearly 29% have no retirement savings nor a traditional pension plan.  Twenty three percent of those households have a form or defined pension plan, but NO retirement savings plan.  What about the other 48%?  The GAO determined that they have "some retirement savings."

In case you are a generation X member or even a millennial, your generation is not fairing much better, in fact many are worse off.

Why are things so bleak for seniors and others when considering retirement? According to a recent study¹ by David F. Babbel, professor at the Wharton School of the University of Pennsylvania the answer is: “People don't buy term and invest the difference."  Professor Babel co-authored and published the report in the May 2015 issue of Journal of Financial Service  Professionals.  (“Buy Term and Invest the Difference Revisited")

“Our study sheds light on Wall Street guidance that has been taken as an article of faith, but that clearly underperforms for many who follow it,” said Mr. Babbel.

 “People most likely rent the term, lapse it and spend the difference,” he said. "And even the minority of those who do invest the difference are prone to the real-world emotional investing when individual investors tend to buy high and sell low, perennially underperforming market indices," he added.  

 

ANALYSIS FALLS SHORT

"Typical economic analyses that compare the cost of buying term and whole life policies fail to properly assess the guaranteed cash value growth component of permanent life insurance," Mr. Babbel said. He noted that cash value guarantees always grow, while a more volatile portfolio of stocks and bonds can rise and fall with the market.

Mr. Babbel pointed to whole life insurance policies that he and his wife bought decades ago as examples (neither of which are New York Life policies). The cash value of his wife's $25,000 policy, purchased in 1988, is now worth $61,138 and his $178,000 policy, bought in 1997, has increased to $307,520. The growth, which has significantly outpaced inflation during those respective holding periods, represents both the annual guaranteed increase plus the policy dividends from their “participating” policies that are reinvested to purchase additional coverage. 

Finally, traditional buy-term-and-invest-the-difference models, referred to as BTID models, ignore the valuable options of whole life insurance such as the flexibility to borrow against the cash value or to take tax-free distributions, he said.

Although it is common to think about term vs. whole life insurance as an either/or decision, it may be more appropriate to think of both.  For example, a young client with a family will not be able to afford all the death benefit he needs via whole life insurance.  So this client should purchase a small, $50,000 or $100,000 whole life policy AND then also purchase the rest of the needed death benefit using convertible term insurance.  As the client's income increases, he can shift more of the term to whole life.

"But I will not need life insurance when I get to age 65," you regurgitate what you have heard on the radio and elsewhere.  The fact is, that statement is coming from the same source that has put so many Americans in the retirement saving perdicament they are in with the Buy Term and Invest the Rest mantra. Real life happens and other factors need to be taken into consideration.

What are some of those factors? Have you heard of  kids moving back in with parents?  What about aging people having health issues? Ever heard of a 65 year old who still has a mortgage on their home? (According to the same GAO study discussed above, 65% either do not own a home or still have a mortgage.)  If you are able to escape these three factors and have gone against human nature and actually saved, then possibly your life insurance can go away when you turn 65.  But then again, think for just a moment; wouldn't it be a bummer if on your 65th birthday your insurance ends and you die the day after?  Tell me seriously when would you not want a tax free benefit for your family?

There are other tax advantaged features of whole life, such as converting the cash value to guaranteed income or borrowing against it. Such tax-free distributions can also be used in retirement to pay for Medicare premiums. Life insurance distributions are not counted in the Modified Adjusted Gross Income calculation that determines monthly Medicare Parts B and D premiums that increase with income.

 Generations of Wall Street professionals have been trained by their firms to trash cash value life insurance so the investment firms could maintain those dollars under management.

To sum it up, this new academic study, using rigorous economic modeling, has debunked Walls Street's heavily marketed, but largely erroneous path to financial security.

 

1. This study received partial funding from New York Life, but Mr. Babbel noted that all of his previous research and that of other researchers cited in the paper were not subsidized and all have undergone rigorous peer review. 

Taxes Destroy Wealth

My title is a bit bold, but math will prove me right.  No, I am not going to use multi-dimensional calculus or other forms of advanced math.  The "complicated" math I am going to use is simply done using a compounding or future value calculator that can be found several places on the web or even in the app store for your phone.  For ease, here is one you can use to verify the math.

Let's do this whole thing telling a story.  October 21st this year marked the day on which Marty McFly used the time travel machine that Doc Brown built out of a modified Delorean.  Let's assume for moment that while Marty and Doc are out doing their thing, you find the DeLorean and go back in time to visit your great grandfather late in the year 1912.  After recovering from the shock, you convince your ancestor to take the $100 dollars you hand him and invest it in the stock market on January 1, 1913.  Your ancestor does your bidding and invests in a mutual fund that does exactly what Dave Ramsay says happens with good mutual funds: "gives you an average rate of return of 12%."

By the skin of your teeth you make it back to 2015, get out of the car, and return it to its hiding place without being noticed.  Awesome plan right?  I am sure you are wondering, "How much money do I now have?"  Using the calculator I mentioned above, the year (N) is 102 (the number of years from 1913-2015), starting amount is $100, and the interest rate is 12%. The result is: $10,477,033 (I am rounding: the actual amount is $10,477,033.01)

Eureka!  Congratulations! You can now retire.  But hold on a minute my dear Watson; you do not have the whole story.  I know this is a story, but any good story is rooted in reality.  The reality is, you have had to pay taxes on your growth every year.  Looking through the history of the tax rates in the US, we learn that the average maximum tax rate is 58.3%.  When we factor in that average tax rate what do you think the account value would be? (This requires a slightly more complicated calculation - i.e. doing 102 calculations each time subtracting out the taxes paid from your account) Would you be surprised to learn that your account would now be worth a massive $14,554?  Immediately you feel jaded and cheated by our blood sucking government for stealing $10,462,479 from you.  But guess what? Looking at the history, the government has only collected $20,209 in taxes over that time.   

That is only a total of $34,663 that your $100 dollars has generated over the last 102 years. WHERE IS THE OTHER $10,442,370 you demand!  The simple answer?  Taxes destroy wealth.  Notice I did not qualify whose wealth they destroy.  To put a finer point on it, the title of the article is not “Taxes Destroy YOUR Wealth.” 

Here is the odd thing, if taxes were lower what would have actually happened?  Making the same calculation using a 25% tax bracket your account value would be $656,905 and the government would have collected $218,935.  Certainly not $10 million, but a whole lot more than $14,554, and better for the government as well.

That is a cool you say.  Let's lower the taxes to 15%.  What is your account value now? $2,006,886 and the government collects $354,139. Getting better…

This entire discussion proves what is called the Laffer curve.  Simply defined, there is an optimum tax rate that gives the maximum to the individual and the maximum to the government.

In our scenario the optimum tax rate is 9%.  Under these conditions you have $3,899,472 and the government collects $385,652.  This total wealth generated by the original $100 you took to the past is still $6,192,009 less; wealth has simply been destroyed because the growth of the money was hampered by taxes. (Note: the optimal tax rate does vary based on what we believe the growth rate will be, but generally the optimum rate is between 10-15%.)

What I am showing you is not new; it is well documented and understood.  In fact, Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments."  It is this same Ibn Khaldum that Laffer gives credit for "his" curve.

Need further proof this is well known?  Listen to the politicians when the talk about tax rates, they are all talking about 10-15% flat taxes.

So how do you want your money?  In a taxable or non-taxable environment?  Tax-deferred is exactly what is says: tax deferred, i.e. pay taxes later.

Don't misunderstand me, taxes are necessary, we need roads, bridges and other basic things, but the more they take the less they and us get.

Conclusion: Taxes Destroy Wealth.

Why are Americans so angry?

 

 

Are you angry?  It seems to me that those who are not angry are blissfully ignorant of what is really going on.  I have had readers of this blog complain that my illumination of the truth tends to shatter their "reality."  I am interested in helping people grow and protect their wealth.  One of the biggest sources of risk to our wealth is our lack of financial education.  That lack of education can be blamed on primarily two reasons.  The first is our own laziness.  However, that laziness is exacerbated by the second reason: too much confusing and misleading information.  

We are constantly bombarded with information about what we should be doing to "invest" for retirement or college or how to finance a car etc.  The problem is many times the information that is  being marketed to us is not the whole truth.  Let me give you an example.  It is a well known fact that a significant portion of the profits for major car manufacturers comes from car financing.  Here is the question:  How can a company make a profit on car financing when the rate is 0.00%?  The answer is: they raise the price of the car to include the interest charges and then say it is 0.00% financing.

The sources of other misleading, or not complete information are endless.  The media is one of the biggest sources.  You always have to ask, how does the commercial benefit the originator of the commercial?  (Ask that about what I write as well.)

Recently there was a surprised admission from “Too Big to Fail"  Wall Street firm Bank of America, the American peasants are informed about a reality with which they are all too familiar. That the U.S. government and the Federal Reserve Bank bailed out the rich and powerful, while leaving average citizens high and dry.

It always amuses me when I come across a mainstream media headline to the effect of: “Why are Americans still so angry?”

Why are Americans so angry? Let’s see. Perhaps it’s because one of the greatest heists in American history was just perpetrated against them by their own government in collusion with the largest multi-national corporations and the country’s most undemocratic institution, the Federal Reserve Bank.  Are you angry?  It seems to me that those who are not angry are the very people I talked about above - financially uneducated.

Continuing why Americans are angry; because not only were the individuals who caused the most severe financial crisis in recent memory not punished for their crimes, but they were showered with trillions and trillions of dollars in bailouts and taxpayer backstops, and made far wealthier than they were before the crisis they caused.

Because 99.99% of the population have been crushed by this policy of “socialism for oligarchs” and they feel the intense pain of this decent into poverty every single day of their live.

That’s why Americans are still angry, and if more of them understood what actually happened, they’d be much more angry. If I have anything to do with it, there will be more American angry - or maybe better said thus: better informed.

Moving along, Bank of America essentially admitted the above in a recent research report. As explained by Bloomberg:

Wall Street is counting its winnings from seven years of easy money.

In a report sent to clients on Sunday, Bank of America Corp. strategists totted up the results of 606 global interest-rate cuts since the collapse of Lehman Brothers Holdings Inc. and the $12.4 trillion of central bank asset purchases following the rescue of Bear Stearns Cos.

The results represent a clear victory for Wall Street over Main Street, according to the team of Michael Hartnett, BofA’s chief investment strategist.

For every job created in the U.S. this decade, companies spent $296,000 buying back their stocks, according to the New York-based bank.

An investment of $100 in a portfolio of stocks and bonds since the Federal Reserve began quantitative easing would now be worth $205. Over the same time, a wage of $100 has risen to just $114.

Zero rates and asset purchases of central banks have, thus far, proved much more favorable to Wall Street, capitalists, shadow banks, ‘unicorns,’ and so on than it has for Main Street, workers, savers, banks and the jobs market,” the BofA team wrote.

My motivation?  I want to help you help yourself.  As I help you, I am helping myself.  Plain and simple. 

Jason@financialtailwinds.com

Stock Market Crash Imminent?

 

 

I have been suggesting to every one of my clients, everyone who attends my speeches, and everyone who reads my blog or receives my newsletter for almost two and a half years, that a stock market crash is imminent. For two and a half years I have been wrong.

I haven't gotten  in trouble with prospects and clients because I haven't told them, I asked/suggested to them. They decided whether the information fit their circumstances or did not. They then acted accordingly based on THEIR belief, not mine.

However, clients, friends, and other agents/planners have loved showing me that I was and continue to be wrong. Please, I don’t take it personally nor am I offended.  It was only an opinion based on probabilities. I don’t have all the facts. I have not received one call from the President, the Secretary of the Treasury or the Chair of the Federal Reserve. To be completely honest, if they don’t know what’s going to happen, how could I?

Isn’t that the point? If the probability of danger is increasing exponentially, ask yourself this question; “If no one knows what will happen, should you be real aggressive financially or should you guard against catastrophe and learn to become more of a financial counter puncher; always putting yourself in position to take advantage of any bad things that could happen?

Many of you have feared taking my recommendations because they are too conservative and you actually might be lose out on some gains by being too conservative.

Ah, but take a moment, because the math simply shows a different story.

Let’s start with the last two and on half years. These are the years that many declared me “Too

cautious! Too conservative!” "Had I listened to you I would have missed out of some stellar years in the market."

Opinions are not worth much, so let us remove the opinion and look at the math.....

On May 1^st, 2013 the Dow Jones Industrial Average closed at 15,115.57. On September 28^th, 2015 the Dow closed at 16,001.89. In 2.3 years the Dow increased 5.86 percent. The average return for that time was 2.55 percent.

The Dow has dropped from 18,300 or so in the last 30 to 45 days. No one would have gotten out. No one. (That bring up another question:  Have you ever heard a financial planner say it is a good time to get out of the market?  Or heard those same planners say it is a bad time to get into the market? )  Also, we need to consider dividends.  The dividend on the companies in the Dow Jones Industrial Average is barely over one percent.

I have several products I recommend, that if you owned during that time frame would have approximated or even beaten that return without the volatility and risk. (Put fear and worry in place of volatility and risk.)

The math becomes even more interesting and counter to what you have heard elsewhere when we increase the length of time we do the measuring.

Here’s another example: On September 1, 2007 the Dow closed at 13,895.63. Again, on September 28, 2015 the Dow closed at 16,001.89. That is an increase of 15.16 percent for those eight years. That is an average return of 1.90 percent. Even adding in dividends, the return is still barely over 3 percent and that is before fees and taxes.

Every product I provide including the "horrible place to invest money," cash value life insurance would have equaled or beaten those returns with lower or no taxes and after fees. WOW!

Just one more; on December 1, 1999 the month before the supposed Y2K trauma, the Dow closed at 11,497.12. It closed on September 28, 2015 at 16,001.89. That is a 39.18 percent increase for those 15.75 years or a 2.49 percent average annual return. Even if I included dividends, my clients have enjoyed better gross and net returns.

 

Get in touch: jason@financialtailwinds.com

 

What does Former Fed Chaiman Ben Bernanke know you do not?

There's no such thing as a free lunch.

Particularly when it comes to getting a few hours of Ben Bernanke's time. The former chairman of the U.S. Federal Reserve charges from $200,000 to $400,000 for speaking engagements at private equity firms, hedge funds, banks, and trade associations around the world.

However, "Helicopter Ben" (also known as "Bearnanke") has made a few pro-bono appearances and speeches in which he provides some great advice on financial matters. Here are the five best pieces of financial wisdom from Ben Bernanke.

1. Be Smart About Student Loans

Student loans are a key issue for Millennials, On the one hand, workers with a bachelor's degree earn about $1 million more in their lifetimes than those with just a high school diploma. On the other, 2014 college graduates owe an average of $33,000 in student loans.

"People have to be smart about how much money they take out," Bernanke recommends to young people. This short piece of advice is very powerful for retirement planning reasons. Your initial employment years are key for retirement savings because money invested then has the most time to take advantage of interest compounding. If student loan payments are preventing you from maximizing retirement savings, you're at a disadvantage.

Bernanke points out that you must find and talk with a student loan adviser on a regular basis. Remember that education is an investment, so that means it must provide returns. Keep student loans in check, live a frugal lifestyle during your college years, and choose your major wisely.

2. Remember Money Isn't Everything

During a graduation speech at Princeton, Bernanke gave this suggestion to the class of 2013: "Remember that money is a means, not an end." He was not saying money does not matter, rather there are other factors to consider when making decisions such as career.

More than half of Americans are dissatisfied with their jobs. While workers making more than $125,000 are the happiest with their jobs, there are still about 35 percent of them who are dissatisfied.

How can this even be possible? Turns out that the two criteria that make people happiest at work are non-monetary. "Interest in work" and "people at work" were chosen by 59 percent and 60.6 percent of workers, respectively.

Bernanke is right in warning that choosing a career based only on money without consideration on love for the work or desire to make difference is a recipe for unhappiness. Give appropriate consideration to these factors, as well.

3. Evaluate If Annuities/life Insurance Make Sense for You

During his four-year tenure as Federal Reserve Chairman, Ben Bernanke had one of the toughest financial jobs in the world.

So, it's no surprise he kept his investments simple. His two largest assets are two annuities (Inside life insurance companies), TIAA Traditional and CREF Stock Large Cap Blend, each valued at between $500,001 to $1,000,000 as of 2007.

High net worth individuals, workers close to retirement age, and workers with a late start in the retirement saving race could all benefit from owning annuities for four reasons.

·         Life Insurance contracts allow your money to grow tax advantaged, create a source of income for retirement as well as pass to the next generation income tax free.

·         Unlike other retirement accounts, annuities and life insurance have no contribution limits. This means that high net worth individuals could put away more for retirement than the $18,000 limit set by the IRS.

·         Immediate annuities allow workers close to retirement to stuff away more money in their nest eggs and start receiving distributions after a short period of time.

·         Some annuities offer a guaranteed stream of income, which is key for those close to retirement age or who have very low tolerance to investment risk.

Owning annuities isn't for everybody, but evaluating whether or not annuities should be part of your retirement planning definitely is. We need to talk.

4. Improve Your Financial Literacy

"Financial education supports not only individual well-being, but also the economic health of our nation," said Bernanke during a teacher town hall meeting in 2012.

Do not kid yourself, Millennials aren't the only ones in dire need of improving their financial education. More than a fifth of Americans think that winning the lottery is the most practical way to accumulate wealth.

Bernanke advises us to improve not only our own financial literacy but also that of our children. He recommends that our focus shouldn't be on memorizing financial products or calculations, but learning essential skills and concepts necessary to make major financial choices. For example, to shop around for a loan to get the lowest interest rate and to start saving early for retirement. Thanks uncle Ben for putting in a plug for me, my blog, and my newsletter.

5. Minimize Costs

When discussing raising gas prices and their effect on the American worker, Bernanke said "it must be awfully frustrating to get a small raise at work and then have it all eaten by a higher cost of commuting."

Whether it's the sale price of your home or the size of your nest egg, you can't always have full control on the returns of your investments. However, you always have much more command on the cost of your investments and purchases. Minimize any type of fees so that you give your investments a better fighting chance. Wow and what is one of the biggest misunderstandings in the financial sector?  THE FEES YOUR PAY IN MUTUAL FUNDS......but that is a topic for another post.