Thought for the day:
“We have had our Biblical seven years of fat. (Now)We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds 3% to 4% at best, stocks 5% to 6% on the outside.” -Bill Gross (after leaving PIMCO)
If you will read no further:
I just watched an interview with a well-known financial planner who committed an unprofessional offense that I see all too often in our business. When given the opportunity, too many of us take it to trash the other guy. I listen to planners on the radio and find myself shaking my head when I hear some of them tell about how (unlike others in their community) they don’t overcharge or they do “Real Financial Planning” or they are more objective because they don’t “sell” you stuff like thoseothers do.
In this case the subject was how bad annuities are, and the “salesmen” (hold your nose) that rip off their clients who they suckered in with a free lunch. It is true that there are abuses in the insurance industry; but financial advisors who specialize in securities (free lunch or not) certainly have their share of perpetrators. I believe that annuities are given a bad rap because most investment advisors do not understand them like they should, only see the bad ones, and after all, they feel they must compete with them.
Clearly there is a market and a legitimate use for these products because they are purchased by the billions each year in spite of a regular tirade by the press every chance they get. Academics from Harvard and the Warton School also endorse them and recommend them as integral parts of a well thought out retirement portfolio. The clients want what annuities guarantee, Safe, Predictable, Dependable, Stress-Free Results. Yes, that is what we as professional financial advisors want to offer as well, but we are not on the same playing field as the institutions who have $billions and a passel of actuaries on their teams. It’s better for us and for our clients if we come to understand these products, how they work, how and why they fit in the portfolio, and why clients want them; and what is the difference between the good ones and the not-so-good ones.
Real Financial Planners have to quit trashing the products and the people who sell them; for then we put ourselves in a place that prevents us from using them when they are most appropriate.
And if Bill Gross is right, that time could come sooner than we would like.
Thought for the week:
Introducing the 529 Plan for Grownups
In 1996 as part of the Small Business Protection Act, Congress approved the Section 529 plan to encourage and allow parents to efficiently pay for their children’s education by saving money while they were growing up to help pay tuition costs for college. The people who have taken advantage of such a plan expected their children would qualify and attend college and there would be many more affordable options if they were financially prepared in advance. So, astute financial advisors began encouraging their clients to assure that they could afford the college of their choice, by saving before hand in a Sec. 529 Plan.
Paul planner is one of these astute advisors whose clients are clearly people who think ahead, anticipate their future needs and take intelligent steps to prepare for them in advance. And Paul routinely points out to all of these folks that they must anticipate the potential need (statistically 70%+) for long-term care at some point during their retirement years. (It’s interesting that these odds may be pretty much the same as those of their children going to college someday.) So Paul educates them all on how to prepare for it, because the cost of care will possibly be much greater than that of a college education; and waiting until they retire to prepare is always much more costly and uncertain because of their health at that time.
Paul suggests the 529 Plan for Grownups*. Instead of funding for college 529 Plan for Grownups funds for long-term care, not by purchasing LTCi insurance but by building an asset over time that will provide significant value when needed to allow complete financial freedom to choose the most desirable option to receive appropriate care when the time comes.
Paul suggested that Jason (46) and Judy (44) incorporate special life insurance policies in their investment portfolio that will also pay for long-term care when needed. He showed them how, at their ages, this is not a big deal financially as they can just be part of the family’s life insurance program to pay a typical death benefit if the worst happens while they are still young; but by the time they retire the plan will be fully funded and in place to provide hundreds of thousands of tax-free dollars to pay for care if needed. If not, they can pass it on to the kids. In either event, the tax-free internal rate of return on this strategy will range from (believe it or not) over 500% to around 5% depending on when the need occurs.
Paul suggested that they contribute $15,000 per year for the next 10 years to this strategy. Once finished they would have a total of $1million to pay for their care or leave to their children all tax free. That’s as much as $20,000 per month each if needed for care and whatever portion of the million is never needed for care can be passed to the kids, grandkids or given to charity. Actually, Jason suggested he fund his with one deposit from his bonus he will be receiving this year. Paul showed him how it would reduce his total required deposits by $8000.
*Special thanks to my son Aaron for his idea
If you would like to see the illustrations referenced above or would like to see one for your client, send me a note at gene@westlandinc.com