Tales from the Trenches

Life insurance, notes industry expert Barry Flagg, is America’s worst managed asset.  This is not good. One in two Americans own at least one life insurance contract.[1] One in five Americans own a contract with cash value.[2] There is nearly $20 trillion in face amount in force.  

Confusion Leads to Failure

Having spent nearly two decades attached to life insurance companies, I believe structural reasons prevent people from properly managing this important asset. 

Starting with the consumer, people think of a life insurance transaction as one-and-done event, rather than start of an important relationship that involves a complicated contract that must be understood, monitored, and managed. In fact, I find few people understand even the basic features of their contract.  

Term means term

Level Term is perhaps the simplest contract, offering a fixed premium for a fixed number of years, after which it’s gone unless extremely high premiums are paid.  I’ve seen people shocked that, as year 20 approaches, their premiums are increasing to unaffordability.  This is a feature, as the tech-industry saying goes, not a bug.  

Permanent may not mean forever

The consumer’s understanding approaches zero as we move from term to the land of permanent insurance. Here the products range from traditional whole life to investment based VUL with a few stops in between for Universal Life and Indexed Universal Life.  These contracts are complicated with varying features of guarantees and flexibility.  People think if they pay the premium on the statement, the insurance will last forever.  This may be true for whole life—provided it does not have a loan—but it’s not the case for many other contracts.  Most people think they own whole life if the policy is permanent.  Yet only a fraction of contracts are whole life. 

Built for Failure 

Finally, the industry is set up to sell policies, not service them.  Insurance agents collect the bulk of their income in up front or “heaped” commissions. Even the most successful professionals cannot afford to spend time reviewing they policies they’ve sold. The average agent has failed out of the typically 100 percent commission business in fewer than five years.[3] The home offices pay people to be reactive not proactive. These policies are known as orphans and we all know from reading Dickens that an orphanage is not an ideal place to be. 

The sad result is often frustration and lost value for the consumer.  Interestingly, best estimates of this closely held secret figure a mere 20 percent of whole life insurance policies eventually pay a death benefit.[4]  Since we all must die, what went wrong? Here are a few examples from my recent travels. 

Studies of Distress

Work is a great place to start with stories of distress. Employers are providing more and more benefits these days, and one popular benefit is group life insurance.  Four in ten life insurance policies are group or employer provided.  This makes sense as it’s easy for companies to distribute and consumer to acquire this insurance. Premiums tend to start absurdly low and then bump every five years, jumping considerably in the 50s and 60s. 

High prices in one’s fifties is not the only thing that can go wrong with group coverage.  Try getting terminal cancer, being forced to go on disability, and a year later, being terminated from active employment.  Your disability carrier will keep sending checks, but you’ll say goodbye group health and life insurance. Not all companies work this way, but some do.  I’ve seen it happen twice.  

The simple lesson: confirm with your human resources that you will remain an active employee if long-term disabled.  If not, secure a contract in the individual market.  You will own and control it, not your employer.   

Universal Confusion

The insurance industry innovated in the late 1970s. Faced with high interest rates and lagging whole life returns, it developed a product known as universal life.  These policies are designed to be permanent—that is, last until the insured no longer does. 

This goal is frequently undermined, however, by the flexibility the policy offers its owners.  The premium required to keep a policy in force is dependent on interest rates, and if those drop the premium must increase or the policy has a good chance of expiring.  The interest rates for the policies set up in the 1980s and 1990s were high, and therefore the suggested premiums were low.  As the rates dropped, few people understood that the premiums they needed to pay moved in the opposite direction.  

I’ve seen happen to scores of clients.  It’s an industry problem. Not company specific.  Joe and Jane provide an illustrative case.  They purchased a universal life policy on Jane in 1985 when she was 21 years old. The Ten-Year Treasury was 10.65 percent.[5]  The suggested premium was $250.  By the time they I stumbled on their policies in 2020, rates hovered at .89 percent, a 92 percent collapse!  

They told me they had whole life when we first talked.  The statement told me otherwise.  I had them call the company for projections of what they will get if they keep paying what they are paying.  These are called in-force projections. 

The sad truth, the policy would expire worthless at age 73 unless substantially higher premiums were paid.  In this case, the solution was worse than the problem.  They could expect to put in more premiums than the death benefit of the policy or walk away with $2,000.  This was after paying $9,000 in premiums.  

The simple solution here is to read your annual statement or get it to an unbiased professional to do so.  Ask for annual in-force projections and adjust premiums slowly to ensure that your permanent life insurance in fact lasts longer than you. 

Tax Free Sometimes Creates Big Taxes

One of the most tragic cases I’ve stumbled up centers on an old whole life policy known as endowment contract.  These policies were designed with good intentions.  Pay a certain amount and had a guaranteed insurance amount and cash buildup during working years.  At retirement, when insurance was projected to be less in need, the cash could produce income for life.  

What could go wrong?  

In this case, the culprit was a feature of the policy that allowed for the cash value to be loaned.  Times can get tough and when they do, a benefit of whole life contracts is that they allow contract owners to borrow their funds, albeit at substantial interest rates, and not have to pay the money back on any particular schedule.  If the loan exits when one dies, the life insurance pays it back.  Until then, the company considers the loan an “asset” and makes money on the interest.  

In this case the contract matured at age 65, at which time the loan either needed to be paid back or the amount withdrawn, plus interest never repaid, in excess of the premiums paid, would be considered taxable income in the year the contract matured.  This unexpected maturity added $180,000 of taxable income in one year.  

The simple solution is to understand the terms of any life insurance loans take. When will they need to be paid back and what are consequences if you fail to do so. 

Yes, You Must Pay the Premium!

The life insurance industry is innovative, and this in generally a very good thing.  In 1986, with the stock market booming, creative people built on the universal life concept.  They reasoned in money market funds could be installed as the engine for life insurance cash values, why not stocks and bonds directly? These registered with the Security and Exchange Commission (SEC) products—sub accounts—soon created the basis for Variable Universal Life Insurance or VUL. 

I confess that I am an equity zealot. I love to own stock in the world’s great companies. As a result, I have a natural bias to this “innovation.” I’ve used it successfully in my life. But there’s plenty of ways to run this train off its promising track. 

I ran into one such derailment early in my career when I met a couple who insisted that their VUL policy was going to last a lifetime as they paid the premium that was established with the agent who sold it to them years prior.  

The agent was of course long since on to other pursuits, which is why I, as a new representative, was attending to this orphan couple.  I had the pleasure to inform them that despite their premium payments, the policy had the trajectory of a Japanese Kamikaze pilot due to the loan they extracted from it a few years prior and never paid back.  

They protested and insisted that this couldn’t be the case, as they always paid the premium.  I explained that a dollar can only be one place at a time, and if they extracted and spent these dollars, they could not possibly support the insurance contract.  I’m not sure they ever understood.  

Fortunately, in this case there was a fix.  By the late 1990s, the industry had developed a new product, a universal life with a secondary guarantee.  This meant that if a preset premium was paid and no loans taken, the policy would last until a person was 121 or dead, whichever came first.  In other words, it was in fact permanent, just like the original whole life contracts.  The catch—which exists with them as well—there is no flexibility. 

The simple solution here lines up with the others.  If you have a VUL, get an annual projection of the expected future values.  Since the returns vary, ask for low future rates such as 6 percent and higher ones such as 8 percent. The company will also provide a zero percent return. 

Push Momma from the Train

No, this is not a section on Danny DeVito’s’ greatest roles.  It’s an exploration of the side effects of a good problem—people are living longer.  It seems that few days pass without news stories of famous members of the greatest generation making it into their 11th decade before moving on. In 1990 only fewer than 100,000 people worldwide were older than 100.  By 2020, that nearly 600,000 will blow out more than 100 candles on their special day.[6]  

This is good news, right? Sure, unless you are the owner of a life insurance policy bought prior to the 2000s that matures at age 95 or 100. 

With many people living past age 95, the question begs: What happens to the life insurance policies? Interestingly, the answer is an adult diaper: It Depends.  

I have one couple who owns two substantial second-to-die policies for whom I started to ponder this question. Second to die or survivorship life insurance policies insure two people, typically and husband and a wife, and pay only on the second death.  These contracts mesh nicely with the formerly rapacious U.S. estate tax rules that delivered a bill when the second person in a marriage died. 

In this case, I have a notion that the woman may in fact make it past 95, the age of maturity for each of their two contracts.  I instructed an employee to call the insurance carriers and get in writing what in fact will happen if she doesn’t get unlucky and die prior to age 95.  The answers did not make me happy. 

For one contract, the policy will remain in force, with no further premiums required.  This is good.  For the other, the policy is done, and the cash value, a sum deliberately far less than the face amount of the life insurance death benefit, will be delivered to the client.  And it gets better.  The amount over and above the premiums paid, will of course be taxable. 

Not much to do here other than the sit tight and hope for the best, or worse, depending on one’s point of view. The simple lesson is to know that life changes, good things can have bad effects and contracts that establish security for the future can blow up. That’s just how it is. 

Bottom Line

I could go on and on, rambling with cautionary tales from nearly twenty years is the life insurance industry trenches.  But what good would that do?  Life insurance is an incredibly important product, and many of you have it.  If this is the case the simple lesson is to take the time to understand what you own, the job it needs to do and whether it is likely to actually do it.  Don’t assume it’s designed to last forever. Then monitor it each year on its contract anniversary.  If you don’t want to do this, hire someone who will.  This will replace big frustrations with big payoffs. 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202412-1384458

[1] Facts About Life 2020: Facts from LIMRA Life Insurance Awareness Month, September 2020. 

[2] Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances. Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, September 2020 Vol. 106 No. 5 pg. 16.

[3] Greg Depersio, “How Hard Is a Career Selling Life Insurance?” January 28, 2021 Invdstopedia, https://www.investopedia.com/articles/professionals/101215/how-hard-career-selling-life-insurance.asp#:~:text=Most%20life%20insurance%20agents%20do,rewarded%20immensely%20with%20renewal%20commissions. accessed April 10, 2021

[4] Brandon Roberts, “Whole Life Insurance Lapse Rates,” The Insurance Pro Blog, June 18, 2018, https://theinsuranceproblog.com/whole-life-insurance-lapse-rates/ accessed April 10, 2021

[5] Historical annual average Treasury Rates quoted on macrotrends.net. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart accessed April 10, 2021

[6] Katharina Buchholz, “Is 100 the New 80? Centenarians Are Becoming More Common,” Statistica, Feb 5, 2021. https://www.statista.com/chart/18826/number-of-hundred-year-olds-centenarians-worldwide/ accessed April 10, 2021

The Unicorn

The second chapter of my forthcoming book It’s All About the Income (May 2022) kicks off with a picture of a unicorn to make the point that there’s no such thing as pure safety, a government-backed investment that “produces high levels of reliable income.” My point is not subtle and in general I’m sticking to it. True financial safety requires a diversified approach, a mix of investments of which some will always be underperforming at any given time.

Yet I’m being proven wrong as I write. I was alerted to this a few months ago on a call with Tom, a smart man who was spending hours educating himself on the ins and outs of personal finance. He’d been spending time on Tik Tok and asked me about a U.S. government-backed bond that pays just over 7 percent. I smelled a scam, explaining that risk always comes with reward, that the 10-year treasury just broached 2 percent, and that this must be a junk bond. “You’re getting ripped off,” I condescended.

I was wrong. Very wrong. And I owe Tom an apology for my arrogance. He was referring to Series I Savings Bonds (I Bonds) that as of November 2021 were paying a six-month interest rate of 7.12 percent annualized on newly purchased paper.

I’ve been pulling penance for my ignorance and arrogance by discussing this opportunity in one-on-one meetings. But it’s long overdue to blast the news. This is not a recommendation to purchase these securities from the U.S. government. They may or may not be appropriate for you. They may work for your financial plan or just be an annoyance. That’s for you to decide. If you want advice, you know where to get me.

That said, here’s the skinny.

I Bonds date back to 1998. They are the direct version of Treasury Inflation Protected Securities and have some important differences. They can only be purchased directly from the government on treasurydirect.com or through a tax return. Each person is limited to $10,000 worth a year, plus a potential for $5,000 more paper bonds purchased with tax refunds.

This provides a strange incentive to overpay taxes to generate a refund of this magnitude. Here’s a hack. Make a fourth quarter estimated tax payment of $5,000 on January 15th. You won’t be providing Uncle Sam much float.

The bonds mature in 30 years and taxation on the interest is deferred until you cash them in. (You can elect to pay the taxes each year if you prefer.) The principal value will never go negative. You must hold them for at least one year.  If you cash them in prior to five years, you will give back three months interest. After five years they are fully liquid without any penalty.

These are the cousins to Series EE Savings Bonds, the traditional U.S. Savings bonds. The returns comprise two features. First, the underlying interest rate, which is currently zero. This rate is set at issue for each bond and will never change.

The second component is a principal adjustment for inflation that is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CFI-U). This index includes energy and food, two of the leading expenditures for many consumers. This rate resets twice a year, in November and again in May. Your bond will reset every six months in the month in which it was purchased.

Given the recent price spikes, the rate jumped to 7.15 annualized in November 2021. As the table below illustrates, some purchasers of I Bonds in previous years are already enjoying 10 percent or higher returns due to base interest rates of more than 3 percent in earlier times. Hence my Unicorn, almost. In my defense, there have been plenty of years in which these bonds did not produce high income. Therefore, the current rate of return can’t be considered reliable. 

I like to say that there’s always something good going down somewhere in personal finance opportunities. Right now, I Bonds present an interesting opportunity for risk-averse investors who seek inflation linked interest rates. The only drawbacks are the small quantity of these bonds which you can purchase and the inconvenient fact that, given today’s high prices, the real returns are set at zero. That’s still better than what banks are offering.

---

Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN

Creating a Picture of Your Ideal Financial Future

The following is adapted from Keep It Simple, Make It Big.

What is the best way to save for retirement?

This is the question I am asked time and time again, but there’s no simple, one-size-fits-all answer. Your answer to this question will be unique to you. 

Before you can answer this question, you need to create a picture of your ideal financial future. Only after you determine where you want to go, can you begin thinking about how to get there. 

To create a picture of your ideal financial future, you need to ask yourself two different, important questions.

#1: What Does Money Mean to You?

This is an important question, yet one that few people ask themselves. It’s the first question I ask participants in a retirement-oriented class I teach. 

I’ve been helping people build, protect, use, and transfer wealth for nearly twenty years. I know that there are many answers and that each answer has important implications for how one designs a financial plan, an approach to life, and ultimately financial independence. 

Here are some common answers and approaches, although some may not be readily admitted.

• Freedom

• Security

• Time with family

• Power

• Control

Each of these is legitimate and each of them will lead to a slightly different approach to work, leisure, investing, and protecting wealth. 

A person who values freedom, for example, may place a premium on the spending side of financial life, keep a close eye on expenses, and invest a high proportion of after-tax income. This enables them to quit a job temporarily or even permanently, and not get boxed into bad situations. 

This is quite popular these days as the Financial Independence Retire Early (FIRE) movement demonstrates. How they invest their savings will depend on their overall risk preferences and ability to tolerate the downs of ownership investments. But they better have a plan to stay independent and therefore free.

A person who values the power that money provides—and it can provide a lot—will have a different relationship to work, spending, and investing. For most, work is the source of at least some power and plenty of income that facilitates spending, which itself provides both real and perceived power. 

Someone who values the power of money will likely work longer, save and invest much less, and consume a higher portion of income. These choices will drive a need to work longer to support the lifestyle. How this person saves and invests will again be driven by many factors, but the need for consumption will require a commensurate need for near-term liquidity to pay the bills.

#2: What is Your Ideal Retirement?

This second question I ask is simple, yet it often elicits some blank stares, so I follow it up with specifics that assist people in moving through their checklists.

Where are you living?

• Your current home

• Condo in Florida

• Trailer in Mexico

• Hacienda in Spain

• House in California

• Apartment in Greenwich Village

What are you doing?

• Working at Walmart

• Volunteering at church, temple, or synagogue

• Tending your garden

• Surfing in San Diego

• Taking care of grandchildren

• Traveling the country in a motor coach

Where is your money coming from?

• Social Security

• Employer-sponsored pension

• IRA

• Tax-deferred annuity

• Personal investments

• Part-time income

• Children

This last bullet produces laughter and rolling eyes. I know this as I have been one of those children who at times caused the money to move in the wrong direction—from parent to child.

Setting aside us deadbeat children for a moment, the answers to these big questions are exactly what you need to flesh out to create a picture of your ideal financial future. 

Preparing for Your Ideal Financial Future

By answering these two questions, you can begin preparing for not just retirement, but your ideal financial future.

So set aside time with your spouse, loved ones, or just yourself to brainstorm your future. Bring yellow pads and ask yourself and each other these questions. Don’t prejudge. Big goals motivate. Don’t ask, “Why?” Ask, “Why not?”

Begin the process of dreaming the big dreams and defining your retirement goals, and you can begin moving toward your ideal financial future.

For more advice on creating a picture of your ideal financial future, you can find Keep It Simple, Make It Big on Amazon.

Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.  6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202210-272636

4 Strategies to Conquer Financial Risks

The following is adapted from Keep It Simple, Make It Big.

Everything in life carries risk, and investing is no exception. Even if you take no nominal risk with your money—you stuff $100 bills into a nuclear-war-proof safe in your basement—you are still subject to one of the most pernicious risks: the loss of purchasing power of money through inflation. 

Financial risk can never be completely eliminated, so you must instead find ways to manage it. Managing your risk is the key to enjoying a life and retirement free of financial worry. 

In general, risk can be addressed in four ways. The options available will depend on the nature of the risk, its likelihood, and likely financial consequences. Which option, or combination of options, you select is a personal choice. It will, however, impact those who depend on you.

#1: Avoid Certain Behaviors

The first way to address financial risks is to avoid certain behaviors.

Consider the risk of dying or being disabled in a motorcycle accident. A way to avoid that risk is to simply not ride a motorcycle.

With your finances, you cannot try to avoid all risks. That would require utilizing only “safe” investing or saving methods, and the problem with these methods is that they do not come with a high enough interest rate to match inflation. While you technically wouldn’t lose any money, you would lose a significant amount of purchasing power.

That said, there are certain behaviors you should avoid to minimize your financial risks.

First, don’t engage in speculation. Speculation is high-risk and is akin to gambling. There’s potential for big wins, but also potential for catastrophic losses. 

Second, don’t concentrate your wealth into a single stock. Concentration of company stock in a 401(k) plan is an all-too-common mistake. At Enron, a famous corporate blowup in 2001, 62 percent of the assets in employee self-directed 401(k) accounts was Enron stock. When Enron’s stock became worthless, so did 62 percent of the account balances in Enron employees’ 401(k)s. 

Enron was not the first company stock calamity and it won’t be the last. A stock doesn’t have to become worthless to punish overconcentrated investors. A sharp decline in value can have big ramifications, so avoid putting too much of your wealth in company stock.

#2: Adjust to Minimize Consequences

Your next risk-management strategy is to adjust to minimize consequences. In the motorcycle example, this would be wearing a helmet, gloves, and leathers, and not driving in poor weather.

The best way to minimize the consequences of financial risks is diversification.

You should diversify in two ways: (1) allocate investments over many asset classes and (2) diversify investments within asset classes.

Diversifying across asset classes means that you don’t put all of your money in, say, the stock market. Rather, you put some money in stocks, some in bonds, some in a life insurance policy, some in an HSA, and so on. 

Different asset classes react differently to economic changes, so by allocating investments over many different asset classes, you can help insulate yourself from market downturns. During the 2008 financial collapse, for example, those investors who had allocated some assets to US government bonds did better in comparison to those who were only invested in the stock market.

Diversifying investments within asset classes is also important to managing risk. If you are invested in only a single stock, for example, and something goes wrong, the consequences will be disastrous. With your money spread out across many stocks, a single stock’s decline won’t affect you as much.

It’s important to not only diversify in number but type. For instance, in the dot-com collapse in early 2000s, if you had fifty different stocks but they were all technology companies, you were in trouble. In contrast, investors who were allocated to other kinds of stocks, like foreign stocks, did not suffer as much loss in value.

#3: Transfer Risks to a Third Party

Your third option is to transfer risks to a third party. In the motorcycle example, this would be purchasing life, disability, motorcycle, and liability insurance.

It’s a good idea to transfer risks to a third party when a risk is unlikely but would have severe consequences if it were to occur. For example, a 30-year-old person is not likely to die, but if this person is the breadwinner for a family, the consequence of his passing might have catastrophic consequences for those he loves. Therefore, it’s wise for him to have life insurance.

We use insurance to prevent physical and human tragedies from becoming financial tragedies. This category of risk management includes all the various insurance policies that protect you from the financial costs of unexpected events—health insurance, life insurance, disability insurance, homeowners’ insurance, car insurance, and so on.

With this method, it’s important to note that risk must be transferred before it is imminent. In general, once insurance is needed, it cannot be purchased at a reasonable cost, if at all. So get insurance early, before you need it.

#4: Retain Risk

Your final risk management strategy is to retain risk, being prepared to accept the consequences. For example, in the motorcycle example, even with insurance and the proper equipment, if you’re injured, you will have to deal with some consequences, including insurance deductibles and copays.

You should retain risk in cases where a risk is unlikely and of little consequence, such as a dorm-room refrigerator breaking down. 

In deciding which risks to retain, you need to be honest with yourself. Just because you can retain a risk doesn’t mean it’s a good idea.

A few years back, I was listening to a popular personal finance radio show, and a woman called about a neighbor’s tree that had crushed her house in a storm. It was considered an act of God, so it was her responsibility, not her neighbor’s. 

The host told her to contact her insurer, and it would pay the bill. The caller, however, was out of luck. She’d paid off her house and cancelled her homeowner’s insurance to save money. Big mistake.

A frugal mentality can cost you more money in the long run, so be thoughtful about the risks you choose to retain. 

Manage Your Risk

“We know only two things about the future,” says Peter Drucker. “It cannot be known, and it will be different from what exists now and from what we now expect.”

You cannot predict the future, so you cannot totally avoid life’s risks. But you can—and must—manage them.

With a combination of all four of these strategies, you can better prepare for the risks of life and ensure they don’t turn into financial catastrophes.

For more advice on managing financial risks, you can find Keep It Simple, Make It Big on Amazon.

Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.  6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202210-272625

5 Steps to Build a Retirement Investment System

The following is adapted from Keep It Simple, Make It Big.

Finance is a lot like fitness. No matter what you read, hear, or are pitched, there is no single solution, no silver bullet to getting in shape. Likewise, there’s no one solution for retirement investment.

Rather, you need a system. With a system of exercise and diet, applied consistently over many years, you can attain your health goals. In the same way, to reach your financial goals and live a comfortable retirement, you need a system of investment. 

Everyone needs a system. Without a system, your retirement dream could quickly turn to a nightmare, as you struggle to make ends meet. While each individual’s system will vary according to their needs, there are five steps that are universal.

Step #1: Establish Your Goal

The first requirement in your system is a goal. Life is like that. If you don’t care where you are going, any road will do. That should not be the case for your financial plan.

Start by thinking about what money means to you. It could be freedom, security, time with family, power, control, or something else. Whatever it is, it will affect your goal.

Then think about what your ideal retirement looks like. Where are you living? What are you doing? How much money do you need each month to have that ideal?

Here’s an example of a goal: based on a detailed expense projection, with family vacations factored in, a couple needs to generate $8,000 a month in pre-tax income. That’s the need.

Step #2: Evaluate Your Resources

After establishing your goal, you next need to evaluate your resources. Start with what you already have available, and then calculate what you still need to reach your goal.

For our example couple, let’s assume they receive $4,500 in Social Security each month and do not have a pension. Therefore, they need to generate $3,500 from investments. 

The first thing to figure out is the size of the portfolio required to generate this income. Most people do not want to invade principal, and it takes a lot of assets to generate enough income through interest.

So how much income can safely be withdrawn from a portfolio?

The widely, although not universally accepted, answer to this question is 4 percent a year. Pessimists on financial markets claim this may be too high. Other researchers relying on historical data show that a rate could be higher if careful systems are followed. 

For the purposes of this example, we will use 4 percent. It has been tested relentlessly with both real-world returns and academic laboratory modeling, and I consider it safe in my practice.

Using 4 percent, this couple would need a portfolio of $1,050,000. ($1,050,000 x .04 = $42,000 a year, or $3,500 a month.) 

Let’s assume that they have $1,200,000 among retirement plans, bank cash, and non-qualified investments. If they didn’t have enough, they’d have to reevaluate their goals or go to a more aggressive withdrawal plan that would rely on using principal. 

Step #3: Create an Income Reservoir

Safety needs to come first, and the first piece of safety here is to create an income reservoir. I often call this the operating account. This mandatory account is a pool of money that will help protect principal and be liquid when needed. 

I usually suggest three to five years of income. In this example, the couple needs $42,000 of income a year, so they need $126,000 to $210,000 for their income reservoir. 

How these monies are invested will depend on options available in employer plans—many have attractive stable value funds that can’t be replicated in IRAs—and the interest-rate environment. The key is that this is an expected income reserve, not emergency reserve, so each $42,000 needs to be available at the start of the year. Laddered CDs can therefore be used if the rates are attractive. 

For this example, let’s put $160,000 or roughly four years of expected income into this account. We now have $1,040,000 of the original amount left.

Step #4: Create a Retirement Account

The next account to consider is what I call a retirement account. This is an annuity, typically a variable annuity with an income rider, although it could be a fixed-indexed annuity with an income rider. 

There are two reasons to use annuities.

First, because they are expected over time to use both principal and returns to generate income, they can generate income at a rate greater than 4 percent, and in some instances, as high as 7 percent. This income will generally not inflate over time, but it will initially relieve pressure on the investment portfolio.

Second, they are hybrid accounts that combine liquidity and guaranteed income. Unlike an immediate annuity that requires people to give up substantial sums to “purchase” a lifetime stream of income, these products allow people to retain access to the principal, subject to the terms of the contract. Typically, there are surrender charges that limit full access to investment values for a number of years.

It’s important to be clear on the structure of the account. Money used to generate the income can’t be removed in lump sums without affecting the amount of income. This is true of investment accounts as well, but it’s more pronounced with annuities as the income guarantees are often greater than the account value.

For our example, let’s move $200,000 into a variable annuity with a 6 percent income rider. This will generate $12,000 a year or $1,000 a month of income.

Since this income is initially guaranteed, it reduces our target need from non-guaranteed investments from $3,500 a month to $2,500, or $30,000 a year. Our income reservoir now covers more than five years of withdrawal needs.

Step #5: Create a Capital Account

The remaining $840,000 is invested in a total return investment portfolio consistent with the couple’s tolerance for long-term volatility. I call this the capital account. 

If we assume a moderate risk tolerance, it will be between 60 to 70 percent equity. In years of positive market returns, this account will supply $30,000 a year of income. This is 3.6 percent of the account’s value, which is in the safety range of the 4 percent rule.

Many years, this account will earn far more than its target, and this money can be redeployed into the reservoir for future safety or to replace past withdrawals, used for one-time purchases, such as once-in-a-lifetime vacations, or left in the account to compound. In flat and down years, withdrawals can be stopped and taken instead from the reservoir account.

Customize the System

Any retirement system you choose must fit your personality. Fortunately, this five-step system is modular and easily customized for each person, depending on asset levels and tolerance for risk. 

More aggressive investors, for example, might forego the variable annuity. Or couples who do not care about having money left over after they’re gone might choose to take greater income early in retirement, when they’re both around to enjoy it.

By customizing this five-step system to your needs, you can better manage your assets and generate reliable inflation-adjusted income in retirement.

For more advice on creating a retirement investment system, you can find Keep It Simple, Make It Big on Amazon.

Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.  6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000.CRN202210-272639

3 Common Financial Misconceptions About Retirement

The following is adapted from Keep It Simple, Make It Big.

Many Americans think they’ll have enough money in retirement, when the truth is, they won’t.

As Dallas Salisbury, president and CEO of Employee Benefit Research Institute, stated, “Almost half of workers (47 percent) who have not saved for retirement are at least somewhat confident about having enough money in retirement.”

Even if you’ve been diligently saving for retirement, there’s a chance you’re not saving enough, because the rules of the game have changed. Things that held true for your parents or grandparents, no longer apply today. 

In particular, there are three common retirement misconceptions you must be aware of, or you run the risk of not saving enough.

Misconception #1: I’ll Work Until 65 and Keep Working Part-Time

Americans plan to work longer than statistics show we actually do. The average person plans to retire at 65. The average retiree, however, calls it quits at 62. That’s three fewer years of earnings and savings and three more years of withdrawals and depletions. 

For many, early retirement is not a choice. Nearly one in two American workers was forced to quit working earlier than they had planned. Forty percent did so due to disability or health problems. A quarter did so due to changes at their employer. At best, a mere 35 percent left on their own terms.

The vast majority of Americans—four out of five—also say they will continue to work part-time in retirement. Reasons given include health insurance benefits, needing the money to purchase life’s essentials, wanting the money for life’s extras, or enjoying work.

The reality is that far fewer will be able to work in retirement than plan to do so. Although four in five expect to work in retirement, a mere one in three suit up and get to work.

Misconception #2: I Won’t be Retired More Than Twenty Years

In addition to retirement starting far earlier than many expect, it tends to last longer as well.

According to the 2004 ING Retirement Readiness & Middle America Survey, nearly one in two Americans expects to be retired for fewer than twenty years. Sixteen percent expect to live less than fifteen years after saying goodbye to paid employment.

In the past, this was a reasonable assumption. A baby boy born in 1935 could expect to live to 60, and a baby girl was expected to survive until 64. In contrast, a baby boy born in 2015 can expect to live until 78, and a baby girl is projected to reach 81.

With these ages, the assumption that your retirement will last fewer than twenty years still seems reasonable. However, today, if a couple both reach 65, one person can expect to live until age 93. There’s a one in four chance that one will live until 97.

Longevity is the reality we all face. On balance, this is a good thing, of course, but all silver linings have clouds. In saving for retirement, you have to be prepared for the potential of a thirty-year retirement.

Misconception #3: I Can Count on Social Security

Social Security was founded in 1935—when a baby boy could be expected to live to 60 and a baby girl to 64. Today, the Social Security system is struggling to support Americans as life expectancies increase. 

The costs of Social Security are quickly outpacing the income. According to the 2018 Annual Report of the Social Security Trustees, in order for the Social Security funds to remain fully solvent over the next seventy-five years, the payroll tax rate would have to increase 2.78 percentage points, or scheduled benefits would have to be reduced by about 17 percent for all current and future beneficiaries, or about 21 percent if the reductions were applied only to those who become initially eligible for benefits in 2018. 

Bottom line, if no action is taken—and there’s nothing pending—the trustees project a nearly 25 percent reduction in benefits will be required in 2034.

Are you prepared for a 25 percent cut in pay?

You need a plan if Uncle Sam uses any of the strategies available to erode the real value of your Social Security.

Planning for Retirement

Ultimately, when you plan for retirement, you must plan for the unknown. 

You may want to work until 65 and plan to keep working part-time, but there’s no guarantee that happens. 

You might expect to live to 80, but you very well could make it to 95.

A Social Security calculator may say you can expect X dollars in Social Security, but there could be significant reductions in the future.

If you want to ensure you’re saved enough for retirement, you need to plan for all these potential outcomes.

For more advice on saving for retirement, you can find Keep It Simple, Make It Big on Amazon.

Michael Lynch is a Certified Financial Planner with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com. CRN202210-272620

Replace “Or” with “And”

If you’re approaching retirement—or even made the leap from work to leisure already—you’ve been bombarded with stories, studies, and tales of how unprepared your compatriots—and by implication you—are to finance your golden years. Google “retirement crisis” and close to 390 million hits appear. No wonder nearly one in two Americans tell Gallup that they fear not having enough money to fund a comfortable retirement. 

You can relax. You certainly have problems in your future, but paying your bills isn’t among them. This so-called crisis is akin to the global overpopulation crisis of the 1970s that has not only disappeared but morphed into its opposite. The experts now fret that we aren’t having enough children. I’m here to tell you that if you’re reading this article, there is no “retirement crisis” in your future. Your problem will be giving yourself permission to enjoy your money. I’ve got a strategy for that. But first, let me support my countercultural assertions.

Let’s start with the half of working Americans who are worried about retirement. Gallup started collecting these data in 2001 and got similar responses. Those early folks are now retired. Guess what? Eight in ten report they are doing just fine.

This rosy picture is supported by the people at the Employee Benefit Research Institute (EBRI) who’ve been studying retirees for decades. A recent report found that eight in ten retirees report themselves as doing well.  Another EBRI study found that only 20 percent of retirees even make withdrawals from retirement plans prior to being required to do so. Once required to withdraw, eight in ten take only the minimum required.

No wonder: the older the American, the more likely she’ll be wealthy. Americans over age 70 have assets valued at $35 trillion. That includes Warren Buffet, of course, but not Elon Musk, Jeff Bezos, Mark Zuckerberg, or Peter Thiel’s $5 billion Roth IRA. Even after a lifetime of required withdrawals, a substantial portion of people die wealthier than they retired.

Don’t feel guilty if you have a few dollars saved when you read about your destitute compatriots. They likely aren’t destitute. All those stories you read that ten percent of seniors are in poverty and one in three rely solely on Social Security for income? They are bogus, according to American Enterprise Institute fellow Andrew Biggs, who takes the time to fact check the reports.

Those reports are based on surveys, yet Biggs and other researchers dug into IRS data—on what people and institutions report and on the taxes they actually pay—and found as far back as 2008 that retirees self-reported far less income than hit their bank accounts. Retirees reported collecting $250 billion from investments. But IRS data on the same people show that $450 billion hit tax returns.

Biggs, cites other research by Census Bureau economists and the IRS using similar methods shows reported median retiree household income as $41,000 versus actual income of $52,000, a 27 percent jump. This drops the percent of retirees relying on Social Security for at least 90 percent of their income to 14 percent. The poverty rate for seniors drops to less than 7 percent. (By way of comparison, the U.S. government says 16 percent of children live in poverty.)

There are no doubt pockets of financial pain among American seniors. But the norm is financial and life success, not failure and misery.

Back to you. It’s likely that you resemble most of my boomer clients. You are a responsible citizen who took advantage of the myriad saving and investing opportunities that emerged over your working life. You funded you employer-sponsored defined-contribution plans and Roth IRAs when they appeared from a massive tax overhaul in 1997. You may have a pension, which certainly helps. But if not, you’ll likely have made it up from personal savings.

Here’s my general impression, not knowing your situation. You’ll do well to replace “Or” with “And.” This is advice I recently blurted out on a check-in call with a long-time client, who was asking questions about what to do with required minimum distributions from retirement plans. 

Do whatever you want, I said.

Here’s what I mean. In this case, I knew that my clients like travel and dining out. I used a food example and counseled, when perusing the appetizer menu at their favorite restaurant, don’t ask whether to get the oysters, clams casino, or Caesar salad. Instead put an “and” in the sentence and order the oyster, clams casino and the Caesar salad.

I’m not trying to fatten you up, I explained. You don’t have to eat it all, take the leftovers home and replace a future meal. If it will make you happy in the moment, order it and swipe your card with a smile. It’s not going to break you.

This feels unnatural. I got it. When we were building wealth, most of us did so by deftly using the “or” and avoiding the “and” with ourselves and our family. We couldn’t have it all, after all, so we needed to make choices, economize, and save. We could put the pool in the backyard or take the expensive summer vacations. If we did both, we’d be among those who don’t have the dough to retire.

Your discipline in the accumulation phase, combined with smart investing, built a nice pile of money. For many pre-retirees and those who’ve already called it quits, that pile has now taken on a life of its own, compounding nicely. It’s time to spend. That’s out of your comfort zone. The very habits that made you successful work against your enjoying your success to the full.

Back to my clients. We continued our brainstorming, applying the “or and” concept to travel. You’re planning a cruise, I said.  It’s not a question of first-class airfare or an upgraded stateroom. It’s first-class airfare and a premium stateroom. Take the same approach when purchasing excursions. Take the helicopter to the glacier and go salmon fishing. You’re only likely to be in Alaska once. It’s only money. If you don’t spend it, your kids will. They may in fact pay extra to fish for salmon from the helicopter on the way to the glacier. All with your money. Ponder that.

Speaking of kids, you can bring them and the grandkids into the “and” if that makes you happy. You can either snowbird for Christmas (spend the holiday in a warmer climate) or spend it with your children. Do both: snowbird with your children by sending them tickets and putting them up. Consider it an advance on their inheritance.

Don’t get hung up on these examples. They may very well not fit your desires, tastes, or budget. I get it. Absorb the concept and apply it to your life. If you’re reading Retirement Daily, chances are you have enough to put the “and” in your retirement. Take the leap. Do it. You won’t spend you last dollar. So why are you worried about conserving it?

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate

The Four New Rules of Debt in Retirement

Nothing great in life is accomplished without the assistance of strangers. This holds true for personal finance, where leveraging two forms of OPM—other people’s money and other people’s mistakes— often provides the surest route to success.

This embrace of debt always sits uneasy in middle America. We’re trained from birth to abhor debt. Like primal instincts that prompt us to jump when we hear rustling in bushes in the small chance that it really is a venomous snake or something worse, this debt aversion is no doubt an adaptive trait for people with low levels of assets and low levels of income. But just as modern realities have changed smart retirement income planning from its former fetish of living on the income generated from conservative assets, low interest rates combined with relatively large investment accounts change the smart approach to debt.

In this spirit, here are four new rules of debt for the astute pre-retiree to adopt.

1. Your mortgage is not a problem.  

Chevrolet, baseball, and apple pie. It’s in this tradition of good wholesome American living that people aspire to be mortgage-free. I’m all for paying off mortgages, given the right set of facts. But the mortgage-free retirement is a relic of the past.  In many instances, it’s no longer necessary.

In the old world, our grandparents and parents purchased a house, took a 30-year mortgage with a substantial interest rate, and paid this off in a straight line. 

One house, one spouse, one mortgage. This is a great plan. It reduces expenses during peak earning years, creates money for saving and investing, and eliminates an expense in retirement, namely the principal and interest payment. (Note that you always will have a house payment in the form of taxes and maintenance. In this vein, the principal is typically not an expense, but just an internal financial transfer.)

It’s not likely your plan, however. My clients who approach retirement with mortgages usually have good financial reasons for doing so. Today’s rock-bottom interest rates, elevated home values, and aggressive mortgage industry transformed the mortgage from a one-and-done event into a flexible financial tool. When confronted with large expenses that could not be saved for, such as rapidly escalating college tuition bills, the best place to get the money was to leverage the house. Due to government policy, this strategy combined rock-bottom rates with the potential for tax deduction and became the smart money move.

Even folks who didn’t need the cash out made the smart play to refinance their liability as rates dropped, freeing up cash flow for retirement investing. Lowering a mortgage payment and putting the funds in a retirement plan can be a double play, gaining from the difference between paid and earned interest rate as well as from the substantial income tax deduction on home mortgage interest.

So, as we sit in the waning days of 2021 with 30-year mortgage rates hovering at 2.5 percent, the required payment on each $100,000 of debt is a mere $395. Of this, $187 is principal in the first payment. Principal isn’t even a real expense, but rather a transfer from your bank account to your home equity. So the planning issue is, can you easily make the payment? If you answer yes, you can relax. It’s not a problem. Retire with a mortgage.  It’s the smart move.

1. Interest is way cheaper than taxes.

Like most people, I hate to say no. I’m a lover not a fighter. I find honey usually gets better results than vinegar. Yet, one place I have no problem putting my foot down is when pre-retirees tell me they plan to pay off their modest mortgage, $100,000 or more, with a withdrawal from their retirement plan.

Friends don’t let friends drive drunk and fiduciary advisors don’t let clients pay off low-interest mortgage debt with high-tax assets. I don’t allow it. I argue. I reason. I fight. I throw my body across the door to block the exit.

Paying off a low-rate mortgage from a pre-tax retirement plan is the financial equivalent of remaining on Mount Saint Helens when you know the volcano is set to erupt. Not smart. If interest is 3 percent and combined federal and state income taxes approach 30 percent of the withdrawal, you should view paying the bank as a gift from on high.

It’s understandable that you want to be “debt free,” but understand that the cost is the interest. The principal is simply moving money from one of your pockets to another, akin to transferring your wallet from your back to your front pocket. It makes you feel good, but that’s it.

Fasten your seatbelt. I’m going to apply this financial logic to places you may not want to go. 

Finance the car, boat, kitchen, or motor home.

Assuming that your source of funds available for large purchases is your pre-tax retirement plan, I strongly urge you to finance the new or certified used car at low interest rates. If you’re making substantial purchases at Home Depot to keep that house of yours well-maintained and up to date, I urge you to take the zero percent or low percent interest offer on the house credit card.

Again, the interest is usually less expensive than the taxes. Way, way, way less. It does depend on the person, however.

Examine where you sit in the tax brackets. Make sure you optimize your 12 percent or 22 percent bracket. You can accelerate the payoff of the debt as your income tax optimization permits. You are not hostage to the creditor’s repayment schedule. But use other people’s money. Rely on the kindness of strangers. It’s smart.

1. Your retirement plan may be the place to turn for funds.

Let’s go back to the basics. The cost of debt is the interest payment. The principal is something that you got advanced and presumably added to your happiness if not your net worth. The debt scolds will tell you never to borrow against your retirement plan, making up tales of being double taxed and risking a degraded future.

In some cases, they are right. I’ll get to that in the next rule. But in others, they are certainly wrong.

If you are approaching retirement with high-interest debt and decent income, it may be a smart move for you to leverage your employer-provided retirement plan at a much lower rate and kill the high-interest liability.

Again, the cost of debt is the interest paid, so a credit card at 15 percent costs $125 a month per $10,000 versus $33 per $10,000 for the same amount in a 4 percent 401(k) loan. And in the latter case, you pay the funds back to yourself. The real cost is lost investment return that the money would have earned if left invested. It’s a potential double digit return!

Don’t fret about bringing this liability into retirement. At this point, you may have two options to dispose of it responsibly.

First, you can keep paying the loan if the plan allows it. This allows you to finesse the liability to zero at the lowest possible cost.

If not, some plans will cancel the debt a few months after you retire, treating the payoff as a taxable distribution from the plan. Timed correctly, this can be at a much lower income tax rate than while working. 

You will need to do smart planning around this. Make sure the debt is canceled in a low-income year. You may have to retire in the fourth quarter to accomplish this. Taxes operate on a calendar year, so a few weeks can make a huge difference in the rate paid.

1. You may want to keep the pressure on.

Now it’s time for me to backtrack. I am both a student and a lover of people and my strategies accommodate human nature rather than abstract notions of the just and good.

Some of you are happy carrying a few dollars in high-interest credit card debt.

I know this from years of experience.

You’ll tell us financial people what we want to hear, proclaiming that you want to pay your debt down to zero. Yet you are in fact fine with some affordable level of revolving debt. Your actions make this clear.

It’s like my target weight. I’ll tell you I want to get back to 165 pounds.  When I’m 190, I’ll make the necessary moves to move the needle south. But at 180 or so, I’ll stall, and that needle will start moving north.

As my dad used to lecture, show me don’t tell me. Economists call it revealed preference.

If your comfort level with debt is $10,000, for example, it is a losing strategy to pay it down with asset withdrawals as you’ll only get right back to your comfort level. At that point, you’ve lost the asset and the debt is right back where it started. It’s better to pay the reasonable price to keep the pressure on. I learned this lesson in the first year of practicing as a financial advisor. 

A couple with debt kept professing a desire to be free of it, whatever it took. I’d put together detailed plans to destroy the professed albatross.  They’d knock it down a little by the mid-year review, but it’d be back in full fury for the annual checkup. At year three, I gave lip service to debt reduction and started an investment program to build wealth.  A few years later, the wife died and most of the debt with her. The investment assets created are still providing support nearly 20 years later. 

In a perfect world, we’d all arrive at retirement with a debt-free balance sheet. No argument here. It’s never smart to let the perfect be the enemy of the good or the good enemy of the good enough. When it comes to debt, you can carry some  and be financially independent at the same time. 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.  

CRN202411-1155517

Seven Simple Steps to Make it Big!

Think Big! Big Goals Create Big Motivation. Don’t ask, Why? Ask, Why Not?  Life is not a dress rehearsal.  Most people do the expected.  Don’t be like most people.  People experience two types of regret.  The first: Regret for things we did.  We all have these.  The second: Regrets for the shots we didn’t take, the things we didn’t do.  Consider your life so far. Chances are your type 1 regrets have diminished over time. The type 2 regrets are likely still nagging you.  Live your life to minimize type 2 regrets.  As Nike instructs, plan to Just Do It!

1. Put a Price Tag on Your Dreams, and Commit to Pay It.  Financial independence is a function of having enough passive income to support your life.  The current you needs to know what the future you’s life will cost. You may be financially independent and just don’t know it.  You may need to devote far more resources to the future you.  Put pencil to paper or a keyboard to a excel and calculate the cost.  Don’t forget inflation.
   
   

2. Line Up Your Income Spigots.  Document your current income sources.  Secure estimates of you and your spouse’s Social Security benefits. Remember, the future estimates are in current dollars.  Add in any employer pensions you may have, private income annuities and your accumulated investments earmarked for retirement.  For the latter, you must estimate the reliable income they will generate.  Start with 4 percent a year. 
   
   

3. Get Tax Smart. It’s not your account balances that count.  It’s the after-tax income that you can spend.  Roth accounts and taxable accounts are always worth more than pre-tax retirement plans and traditional IRAs.  Consider your current and expected future tax positions. Don’t forget your current and potential future state tax collectors. Consider a plan to build Roth and taxable accounts.
   
   

4. Tune Up Your Investments. Determine your tolerance for investment risk, meaning fluctuations in the negative direction.  Remember total stability means near zero pre-tax and inflation return and negative returns after these factors.  To live is to accept risk. There is no such thing as risk free investing.  Compare your current investment to your ideal mix and make the necessary changes.
   
   

5. Build Your Buckets. If you are like most of us, you need three things from your finances in retirement. 1. Stable principal. 2. Reliable income.  3. Growth of income.  These need conflict, as things that protect principal don’t grow and don’t produce reliable income.  Products that produce reliable income generally aren’t liquid and don’t offer much growth and investment that grow, also contract with disturbing frequency. The result: you need to create buckets of income allocation.
   
   

6. Contemplate Your Demise. None of us gets out of here alive. You’re no exception.  If your death would inflict financial pain on someone you love, consider acquiring some life insurance.  What great things do you want your money to accomplish after your gone? Update your beneficiary forms, wills and trusts. Don’t forget your health care directive and durable power of attorney form.  This may be your most important document if protecting your assets is a priority.
   
   

The 8th step.  If you want help with your simple game plan to make it big, email mlynch@barnumfg.com to start the conversation. 

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.  6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000 CRN202210-272520

Financing Summer Fun

Summer’s here, and along with the children at home, long days, and outdoor grilling come additional expenses that have the potential to bust a family’s budget. If not properly planned, a summer’s fun can leave parents paying off out-of-school debt before the back-to-school sales even start. 

Yet if handled well, parents (this also applies to grandparents) can not only survive the summer without adding any debt but also use its dog days to teach their charges valuable lessons. First, the ultimate source of money is not mom’s purse, dad’s wallet, or the even the U.S. Mint, but rather to work. Second, since money stems from work, work stems from time, and time is limited, so too is money. Third, limits require choices. Although no one can have it all, through smart choices we can maximize our financial and non-financial resources.  

That’s just what’s in it for your children. If handled properly, us adults can get valuable work accomplished for money that we would have handed out anyway.

Many parents trade an allowance for a set of chores. This is admirable and advisable, as it ties money to work and teaches children to chip in around the house. It falls short, however, as the cure for the summer-time blues because summer often requires additional money for camps, movies, vacations and other activities. 

Consider providing a summer bonus. Put children in charge of a summer clean up and sale. Most of us have plenty of junk around the house that we somehow never seem to get around to organizing, giving away, igniting or selling. One person’s junk is another person’s treasure. Explain to your children that your household detritus is in fact their summer bonus pool. All they must do is collect it, get approval to sell it (this is very important, as you don’t want your new computer sold at a deep discount), and find a way to make a deal with a willing buyer. 

 Common venues are the standard driveway tag sale, local flea market or now days the virtual Craigslist or Facebook Tagsale. Explain that any money earned is your child’s to keep—this will give them an incentive to price it correctly. Make it clear that this is the summer fun budget, a soon to be determined fixed amount of cash to pay for their supplemental fun. They’ll be no open access to your purse or wallet.

Parents are free to sweeten the pot. A 401K-like match works well. For every dollar they earn getting rid of your stuff, perhaps you’ll match it with $1. You can use this to teach the value of savings. Let your children know that they’ve earned the money, then put it in an account where they can’t get at it. Invest it wisely and show them the statements. 

Many parents will be surprised at their children’s reaction. We are all creative, and once people understand there’s money to be made in making smart choices, they quickly discover prudence. All of a sudden a book from a library rather than from Amazon doesn’t seem like such a bad deal. Children who understand that they get to keep the difference, will suddenly quit complaining about not being able to make regular visits to the $25 water park and instead enjoy a public pool or even better, a free neighborhood one.

With a little luck, both parents and children may end the summer with a little extra cash. 

 Mike Lynch CFP® is a financial planner at the Barnum Financial Group in Shelton, CT. He can be reached at mlynch@barnumfg.com or 203-513-6032.

These are the views of Mike Lynch and not those of MML Investors Services, LLC or its affiliated companies, and should not be construed as investment advice. Neither the named Representative nor MML Investors Services, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, MML Investors Services, LLC makes no representation as to its completeness or accuracy. The author is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, Member SIPC. 6 Corporate Drive, Shelton, CT  06484

Tel: 203-513-6000. 

CRN202006-232146

Changes Gonna Come: Primer on Tax Changes

Investments, retirement plans, taxes and estate and gift taxes make a confusing stew in the more stable of times.  These times, as you know, aren’t stable.  The pandemic, a party-changing election, and resulting massive government spending provide the catalyst for investable change.  The proposals are coming out almost weekly, with mind boggling numbers and strategies to raise the revenues to pay for them.  With this, a slew of nearly inscrutable jargon flow from the lips of television commentators and keypads of pontificators of the written word. A day doesn’t pass when I don’t field a great question from a confused person on how a proposed tax code change will affect them.  

The answer, of course, is no one knows until legislation is passed, singed into law, and implemented by the IRS.  Still, the factors at play are long term-features of the U.S. tax code. Consider this a handy primer to help you make sense of our new unfolding reality.

Ordinary Income, Capital Gains and the Cost of Dying 

Last week, a client arrived in my office and promptly asked how much the proposed changes is capital gains taxes would cost him and his wife.  I examined the accounts, looked him in the eye, and replied confidently, “nothing.”  

How could I be so confident? 

His accounts are all retirement accounts, taxed at ordinary income rates when money in withdrawn.  

This brings me to my first point of clarification.  Your investments and the proceeds that will hopefully flow from them can be thought of as either capital assets or ordinary income assets.  

 Capital assets are things such as your house or investments purchased with after-tax money for which there is a “cost basis.” When you sell, the cost basis comes back without tax.  The incremental gain is taxed as a “capital gain,” either short or long term depending on how long the investment was held.

Retirement plans, whether pre-tax, Roth, or non-qualified annuities, are ordinary income assets.  Here the untaxed portion is taxed as ordinary income when withdrawn.  

In the case of pre-tax retirement plans, this means all of it. In the case of Roth assets, this should mean none of it. And for income assets with a basis, such as after-tax IRAs or non-qualified annuities, this means the portion of payments that is counted as earnings. 

Since this gentleman’s accounts were all IRAs, changes in capital gains tax rates and cost basis structures have no effect.  What he and his wife need to focus on is ordinary income tax rates and the terms on which the accounts must be emptied while alive through RMDs and after death for the beneficiaries. 

The Cost of Stepping Up

Proposed changes to the treatment of “cost basis” at death is the source of most confusion I’m confronting. Longtime rules follow a logical and easy to administer path. Your cost basis is what you paid for an investment plus any future monies invested. 

 In a stock account, this is typically reinvested dividends and additional purchases.  In real estate, it’s material improvements.  Under current rules, if a person gives a capital asset away, the cost basis follows the asset and the recipient will pay taxes on the gains when sold.  If a person dies and passes the asset only when they are no longer able to use it, it receives a step-up or step-down in basis to the value on the date of death. 

Happy Surprises

One of the biggest—and best received-- surprises I deliver to clients is the answer to the question of how much tax they will owe on an inheritance of stock or a house.  I look at them squarely in the eye and deliver the news: “Nothing.” 

“If you sell it,” I quickly add, “very little.”

I can say this because I know that the basis of the asset has reset to recent market prices at the date of death.  A stock purchased by your grandparents for $1 and inherited by you when it was selling at $200 a share, has a new basis of $200.  The ability for $199 a share in gain to be taxed is gone, at least for the moment. 

The President has proposed a change in these rules for some people, reportedly those with more than $1 million in income. Again, the particulars will change, so it’s the principle that’s important here.  The desire is to tax capital gains of more than $1.25 million at a person’s death, regardless of whether the asset is sold or retained by a beneficiary.  

This elimination of the step-up in basis is a major change to the current tax and planning structure. It’s worth keeping an eye on as any change may require an adjustment to your personal financial planning. 

Tax Rates

At present, there are two sets of tax rate tables applied in America. The first is that for ordinary income, which includes earned income, pensions, the taxable portion of social security, and interest income. 

These rates tax income starting at zero for the portion in standard deduction. 10, 12, 22, 24, 32, 35 and 37 percent.  

The feds apply a lower set of rates to long-term capital gains and dividends.  These rates are zero, for those in the 10 and 12 percent brackets, 15 percent for those up into the 35 percent bracket and 20 for people whose income takes them to the top rate. 

In addition to this, the health care reform in the Obama years tacked on additional 3.8 percent for individuals who earn more than $200,000 and couples who top $250,000. 

At present, the top earner’s income will be taxed at 37 percent.  Capital gains and dividends at 23.8 percent.  

The Biden administration proposes two adjustments.  First, increase the top income tax rate to 39.6 percent, where it was when Trump arrived in office. 

Second, apply the ordinary income rate—plus the Net Investment Income Tax surtax—to capital gains for Americans earning more than $1 million. 

This nearly doubles the current top federal capital gains tax rate from 23.8 percent to 43.4 percent.  Throw in state taxes and for some taxpayers the top rate breaches 50 percent. 

At present, the proposed increases are reserved for top earners.  You’ll want to keep an eye on this and apply it to your personal situation.  

Death and Taxes

Both are inevitable and if President Biden gets his way they will be combined more often.  Here we are talking about the U.S. Federal Government’s gift and estate tax structure.  At present, a person can give $15,000 to anyone she wants annually.  In addition, she can give $11.7 million over a lifetime or at death.  For married couples, the numbers are doubled, and the tax is only due after the second to die. Amounts over this are taxed at rates that top out at 40 percent.  

This affects a mere 4,100 households a year. 

The President has not formally proposed changing these limits. Killing stepped up in basis, however, would create an effective death tax at far lower levels of wealth than the current estate tax thresholds. 

Consider Mary, who inherits a house and stock portfolio from her father valued at $2,500,000. At present, if she sells it shortly after inheriting it, she will owe little to no tax. If she keeps it to use and perhaps sell later, she’d only pay tax on growth over $2.5 million when she ultimately sold the assets. 

The proposal would kill the long-standing provision and replace it with a $1 million exemption per individual plus $250,000 for a primary residence.  It will also likely assess the tax at death, regardless of whether the assets are sold. Thus, in this example, Mary’s father’s estate would owe tax on the $1,250,000 gain.  Like a gameshow winner of a car, she vehicle may get sold just to pay the tax on the winnings. 

Stay Tuned

Keep in mind what we all learned Saturday mornings from School House Rock.  A proposal is not a bill and a bill is not a law until passed by both houses of Congress and signed by the President. I’ve outlined a few of the proposed changes.  There are of course many more proposed on the table.  It’s early in the process.  Please contact us with any questions on how the unfolding changes will apply to your situation.  Unfortunately, there is not likely to be much that’s simple with the big changes to the income tax code that is coming our way. 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be reached at mlynch@barnumfg.com or 203-513-6032. His writings and videos can be enjoyed at www.michaelwlynch.com. 

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202305-282833

Summer’s Gone: Open Enrollment Has Arrived

As hard as it’s to believe and accept, Summer 2021 is on its way out. I hope each of you made the most of it.  Hello football, falling leaves and, for those working for large institutions, open enrollment for benefit elections.  It’s this once-a-year opportunity on which I will now focus. 

Employees of large institutions, government, corporations, and non-profits such as hospital chains, typically enjoy a period in the fall of each year in which they can adjust their benefit elections, health care, life and disability insurance coverage, and often ancillary benefits such as pre-paid legal plans. The window if often tight—ten days for example—so it’s prudent to be prepared for the offering when it comes.  These benefits are a key component of most people’s financial plans and it’s important to optimize them. 

Healthy Choices

Health coverage is traditionally the dominant benefit elected in open enrollment.  The coverages and costs of the plans offered are compared in side-by-side tables.  In recent years, high deductible plans with health savings accounts have increasingly appeared on the scene.  These can be confusing, as they present a higher potential initial out of pocket, but also contain a total stop loss on payments, potentially a cash employer contribution to a Health Savings Account, and then the ability for a person to accumulate money completely tax free for use for health care in the current or future years.  As a financial planner, I value these flexible tools and have written about them.  You can find my article here. https://www.michaelwlynch.com/tax-me-never-yeah-baby

It does require some analysis to know if such a plan will fit a person.  We are happy to help you with this. Contact Sarah at my office to schedule a call. 203-513-6058 or sarah.rizk@barnumfg.com

Who doesn’t like tax free money? 

One way to spend $1 for every $1 you earn is to funnel it through a flexible spending account for health care. This is typically use it or lose it, so you need to figure out how much you are likely to spend on deductibles, co-pays and other medical services. The IRS offers a splendid publication https://www.irs.gov/publications/p502 that details all that can be purchased under the umbrella of health care.  Typically, you will elect either a Health Savings Account or Flexible Spending Account.  The former accompanies a high deductible plan and the money will remain in plan from year to year.  The latter sits aside a more traditional health care plan and the money is use it or lose it.  

Another way to save on taxes—but certainly not money—is to have children who need day care.  If you are a Dependent Spending Account, which allows up to $5,000 in contributions in 2021, will let you spend this tax free.  It can also apply for a disabled spouse who needs attention or even dependent parents.  At a 35 percent marginal tax rate, moving $5,000 this way saves you $2,700 in income, Social Security and Medicare Taxes.  

Don’t Die for Free

We are increasingly getting more of our life insurance through our employer.  This has some fantastic benefits, less hassle to obtain initially and easy payment terms, as the funds come from our paychecks. It also has some downsides, as I see it often leading to complacency that can put your family at risk if you’re under covered or leave your job and your coverage behind and your pocketbook in peril if you pay too much in premium as you age. 

Prepare yourself prior to that ten-day period when you must elect coverage.  First, determine how much life insurance you need with a detailed analysis of what happens to the people you love if you die tomorrow. Again, we are happy to help you with this.  Contact Sarah at my office to schedule a call. 203-513-6058 or sarah.rizk@barnumfg.com.  

Second determine how much of this can be acquired through your group plan and, most important, under what terms and at what cost.  Group plans typically increase premiums every five years as we age. It’s starts cheap at the beginning of our careers and often ends up expensive. 

At one company for which I have rates, a 25-year old non-smoker will pay $31.50 a month for $500,000 in coverage while a 55-year old will pay $145 a month. 

Third, determine the range of premiums you would pay if you went into the private marketplace and secured a policy.  This can be done many ways, including online or by contacting an independent insurance agent who has access to quotations from multiple companies.  

Once you have figured out the likely private costs—it’s always a guess until the companies get a medical on you—you can compare the overall value of covering all or a portion of your protection need though group or private or a combination thereof.  Be sure to calculate the group premiums for the duration of the expected term. A private plan may start out more expensive but provide big savings over the last decade of coverage. 

Key action item:  If it appears private insurance is a better value for you, you need to apply early enough that you are approved by the end of the open-enrollment period.  A cornerstone concept is protection planning is don’t give up any insurance until you have the replacement contract fully executed. 

Protect the Money Machine

Disability Income Insurance is increasing becoming an option to elect at open enrollment. With disability, as with life, you should also conduct a thorough needs analysis to determine how much after-tax income your family needs if you can’t work.  Insurance is always an expense, so you want to make sure you obtain the proper amount.  Here too we can help. Contact Sarah at my office to schedule a call. 203-513-6058 or sarah.rizk@barnumfg.com.

Plans vary widely, but one thing they all have in common is they won’t replace 100 percent of your income.  Given that most people live on all their income—when essential savings in included—I typically recommend taking as much as possible.  Your needs analysis will determine if this is true for you. Exceptions to this include people who don’t need their income to support themselves and sometimes workers past age 65 for whom the group coverage would only pay out of few months or years. 

The second election that is increasingly common is whether to have the benefit paid by your employer or have you pay it or pay tax on the premium.  Counterintuitively, you usually should pay it or have the employer’s payment count as taxable income to you.  

Here’s why.  If you pay the premium or have it included in taxable compensation, which is small, the benefit which is large is income tax free.  If your company does not pass the premium through to you as taxable compensation, the benefit is taxable.  

Finally, if your group plan is insufficient to meet your needs—or unusually expensive—you should look to the private marketplace to secure an individually owned policy.  

Bells and Whistles

You company may offer other valuable benefits, in addition to these core offerings.  Common free offerings include Employee Assistant Plans that provide professional help in tough times.  A potentially valuable offering I’ve myself used in the past is group legal plans—I think of them as HMOs for lawyers—that provide you will access to pre-paid legal services based on a low payroll contribution.  Common uses for this include real estate transactions, wills and estate planning and even traffic violations.  Be sure to read the offering booklet your employer provides carefully.  You never know when you may need to rely on some of the services.  They are part of your overall compensation package.

Don’t Delay

Life’s busy and open enrollment comes and goes quicky. The default is typically your last year’s elections.  These may serve your needs.  They may not.  Do yourself and your family a favor and take the time to thoroughly analyze your employer’s offerings and compare them to private alternatives.  It may just make a big financial difference someday.  As always, we are here to help. 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT, a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.

Old Formulas Collide with a New Reality

Group exercises are fun, especially when they bring diverse people together into a shared experience. That’s why I always encourage the adult students that populate my financial planning classes to fill in the blanks to this admonition.  

The formula to financial success our elders taught is simple. Get a good job and ________ it.  Spend less than you ____________.  Put the money in a safe ___________. When you retire, live off the ______________.  Never touch the __________.

Nearly everyone in the room can blurt out the blanks—and most do.  Keep. Earn.  Place.  Interest.  Principle.  

“How is that working for your today?” I ask, as I chuckle and then watch smiles turn to grimaces. The problem, my students note, is that there is no longer any interest. This is certainly true in a world where banks spend money to advertise “high interest” savings accounts paying 1.15 percent.  

But I think this misses the point, as there’s nothing any of us can do to increase the interest on “safe” assets.  The real problem, I assert to a room full of unbelievers, is that we are defining safety all wrong. Our grandparents’ safety is our risk. 

If “safe” means principle can never decline, guaranteed by our fellow taxpayers, then we place ourselves at the mercy of the banking industry and purveyors of government bonds and products backed by them.  But how safe are assets that increase at 1 percent when the government is committed to increasing inflation at a minimum of 2 percent?  At best, these vehicles lose money safely, which is akin to other great oxymorons such as jumbo shrimp. 

 What we need, I assert, is to redefine safety in our minds to mean we have inflation adjusted income when we need it. So today, a dollar needs to be a dollar.  But in ten years, assuming 2 percent inflation, that dollar must be $1.20.  And this is just if you want to tread water.  To make any progress, it must be greater. 

It’s not that we don’t need some money in principled-guaranteed assets.  We do. It’s just that the money we need in 5, 10, 15 and 20 years needs to be in assets that will grow both principle and income.  This, I intone, must be your “new safety.”  In other words, the only assets that will be safe for us in the future are Investments that, at the very least, have a fighting chance of delivering future income and asset returns that match, if not surpass, inflation.  If not, like a swimmer treading water in a river heading to sea, you will soon find yourself adrift in the middle of a financial ocean where today’s dollar buy’s $.50 of yesterday’s goods.  

It’s one of life’s great tradeoffs.  Investments that guarantee principle allow income to fluctuate.  Investments that allow principle to fluctuate, offer much more stable incomes and incomes that often increase over time.  

 Consider that the average interest rates on 6 month CDs collapsed 82 percent from 4.75 percent in 2007 to .85 percent today. This is catastrophic for people relying on safe money for income. By contrast he dividend paid on $100,00 of the S&P 500 owned in the SPY ETF increased from $1,900 in 2007 to $3,205 in 2016.  The dividend dropped 20 percent in 2009. This was far less than the 43 percent drop in principle from March 2008 through February 2009.   Both principle and dividends were surpassing 2007 levels by 2012. 

Most people, as our grandparent’s financial success formula instructs, live off the income, not the principle. Therefore, for most of us, safe assets are not what we intuitively believe, government-backed bank CDs and bonds. These suffer wide fluctuation of income and near-certain depreciation of principle. Safe asses can only be dividend paying stocks, ownership in America’s and the world’s great companies, owned in a diversified portfolio of individual securities, closed end funds, exchange traded funds, insurance company sub accounts, or mutual funds.  This, combined with income producing real estate, is our only chance of not going backwards over a 30-year retirement or a 90-year life. It means that we have to accept the fluctuation of principle, which at times will mean scary drops of 20, 30 and even 50 percent.  But isn’t that preferable to a guaranteed loss of 25 percent, or even worse, over 30 years? 

This article was prepared by Mike Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and is not intended as legal, tax, accounting or financial advice. Michael is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC.  Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. He can be reached at mlynch@barnumfg.com or (203) 513-6032.

The opinions provided above are not necessarily those of MML Investors Services, LLC. The opinions provided are for general information purposes only. 

CRN202206-266878