Annuities: Better Alternatives Than Equity-Indexed Annuities
Equity Indexed Annuities (EIAs) have become the hot product of late. I believe you can easily find other alternatives that will bring a better return, without locking up your money or levying hefty surrender penalties. I’ll discuss these alternatives in the next two articles. But first, you should understand two things: your purpose for investing and how EIAs work.
Know why you’re investing. For simplicity let’s consider two objectives–stability and growth. If you are primarily concerned about protecting your investment and earning a stable rate of return then your main objective is stability. On the other hand, if you are concerned about protecting yourself from rising prices, building a retirement nest egg or growing your wealth then your primary objective is growth.
It’s unlikely that your objective will be 100% stability or 100% growth. Usually it will be a combination of the two. For instance, if you’re 55 years of age and preparing for retirement, perhaps you’d want about 40% of your portfolio invested in ’stable’ investments such as bonds or CDs, and 60% invested in equities such as stock mutual funds.
On the other hand if you’re 75, stability may be more of an issue for you. You still want to plan for inflation, but your objective is very different from a 55 year-old. You might have 70% in stable investments and only 30% of your money in equities.
Maybe you’ve been told EIAs are the perfect answer. They’re sold as delivering both stability and growth. Salespeople say you can participate in the growth of the stock market without the risk, while always earning a minimum of 3%. It seems that an EIA will help you meet both objectives. Upon closer examination, though, you will see that it doesn’t do either very well.
EIAs are said to provide stability because they provide a minimum return of 3%. Let’s put that in perspective. In return for that 3% minimum you are required to keep YOUR money in the investment for many years, or else pay a penalty that in some cases could be the equivalent of over 3 years worth of return!
Moreover, that 3% minimum doesn’t change over the long length of the investment. If interest rates increase during those 7 to 12 years, you will be unable to take advantage of them. Imagine how you would feel if you knew you could be earning 5% or 7% in a CD or government-guaranteed bond, but you were stuck in an EIA paying 3%! The stability an EIA provides just doesn’t measure up.
So let’s take a closer look at the growth offered by an EIA. Typically, your investment choices are limited to the S&P 500, NASDAQ, or a bond-related index. But EIAs place a limit on how much you earn. If these indexes go up 25% or 50% like they did in 2003, you may only earn 10% to 12 %.
EIAs only allow you to only participate in a portion of the index’s return, or they have internal charges of 1-2%. Even if the underlying index goes up 10%, your return will be lower. This makes sense when you realize the insurance has to earn back the enormous commission it paid the agent. The insurance company can’t pay a 3% minimum in the bad times AND allow you to get 100% of the return in the good times.
So, in an EIA, you bear the risk of investing in the stock market but don’t get all the return. Don’t stack the deck against yourself. When you invest in equities you should have access to thousands of choices, and get all the return.
The bottom line: why trap yourself in an investment that greatly limits your upside potential and shackles you with outrageous surrender penalties, all for a measly 3% promised return, while your agent walks away with a 10 or 12% commission? No matter how you need to split your portfolio between stability and growth, believe me, there are much better ways to manage your money. I’ll talk about them next week.
Estate: How To Legally Avoid Taxes On Gifts And Inheritances
Nobody likes to pay taxes. If done incorrectly, though, the way you inherit an asset can result in you needlessly paying tens of thousands of dollars in taxes. Knowing some simple rules will reduce your tax bill and allow you to keep more of what you inherit. And it will also keep you from creating tax headaches for loved ones to whom you wish to gift assets.
Whenever an asset is sold, Uncle Sam wants to collect capital gains tax. And that tax is figured using cost basis. Cost basis refers to how much money you invested in a given asset. When sold, the cost basis is subtracted from the amount received to determine the gain or loss. Your amount of gain or loss then determines how much you will pay in capital gains tax.
If you buy an asset for $10,000 and sell it for $25,000, your cost basis is $10,000 and the taxable gain is $15,000. Currently, the highest capital gains tax rate is 15%, which means you’d owe capital gains tax of $2,250. Losses can be used to offset other gains, but we won’t get into that in this article.
Determining the cost basis can get complicated. If you buy an asset and add money to it, your cost basis increases. If it’s a mutual fund and you have the dividends reinvested, that adds to your cost basis. If you sell a portion, that affects your cost basis as well. This means that it is important to keep track of the amounts you paid and received on all of your assets.
An asset can be many things, not only stocks and bonds but also houses, property, jewelry, coins, artwork, etc. Legally, you are required to pay capital gains tax whenever an asset is sold at a profit. In fact, 1099’s are issued whenever investments like real estate, stocks, bonds, and mutual funds are sold.
Here’s where people lose thousands of dollars. If someone gives you an asset, you ‘inherit’ the giver’s cost basis in that asset. So if mom gives you $10,000 of stock that she’s owned for years, you inherit her cost basis and are responsible for paying the capital gains tax on it when you sell it. If she only paid $1,000 for that stock and you sell it for $10,000 then you will owe taxes on the $9,000 gain.
On the other hand, let’s say you inherited that stock from mom after her death (through her estate). Then your cost-basis would be the stock’s market value at that time. This is called ’stepped-up basis’. So, even if mom only paid $1,000 for the stock, if it is valued at $10,000 when you inherit it you can sell it and not owe any capital gains tax. You just legally avoided the Tax Man!
This stepped-up basis is the government’s way of making up for people having to pay taxes on the transfer of their wealth. But estate tax laws are in a state of flux. Under current regulation, the stepped-up basis disappears in 2011. However, there’s some talk in Congress of doing away with stepped-up basis altogether, especially since the death tax only affects estates that are larger than $1,500,000. Most likely, if Congress ends the estate tax for all but the largest estates, they will collect revenues from smaller estates by abolishing stepped-up basis.
There are situations where it is better to have an asset given to you instead of it being inherited. It all depends on the size of the estate. Death taxes range from 37% to 50%, while capital gains tax rates are capped at 15%. So if an estate is going to be worth less than $1,500,000 then there will be less tax paid by inheriting an appreciated asset through the estate. If an estate will be worth more than $1,500,000 then less tax will be paid on that appreciated asset if gifted to you prior to death.
I’ll provide several examples in my next article that will clearly illustrate real-life situations. That way, you will be able to more easily determine which course of action you should take and can save thousands of dollars in the process! There’s no reason to pay tax when you don’t have to!
Estate: To Trust Or Not To Trust . . . That Is The Question!
Living Trusts have become very popular and are being heavily promoted to seniors. Should you Trust or not Trust? That is the question. Read on to learn some simple guidelines that will help you know whether a Living Trust may be right for you and how to go about getting one if needed.
A Living Trust is considered a separate legal entity much like a corporation. As a result, any assets ‘owned’ by the Trust at your death avoid Probate and can pass to your heirs simply and easily. It also provides for the management of your assets if you become incapacitated.
Living Trusts can be complex documents that allow you to precisely detail your wishes or they can be a straightforward means of handling your estate. Even though the Trust is considered a separate legal entity, you retain complete control over everything you own. In fact, a Living Trust can allow you to control assets from the grave.
A Living Trust will not protect your assets from lawsuits or creditors. It won’t ‘hide’ your assets from Medicaid should you need to go into a nursing home. It won’t automatically eliminate all estate taxes, though it can help eliminate some and reduce others. And a Living Trust only controls those assets that are ‘owned’ by it, so unless you re-title your home in the name of the Trust, for instance, the Trust will not protect it from having to go through Probate.
Living Trusts are being heavily promoted through seminars. If you attend one, you may come away feeling that everyone needs a Trust. That’s not true. Although many people will benefit from one, they are not for everyone.
Take ‘Lily’, an 82-year old widow from LeHigh Acres, Florida who recently called me. She was being pressured to get a Trust after attending one of these seminars. “If you don’t get one, you will have to pay thousands of dollars in taxes when you die,” the salesperson told her. That is completely untrue. In fact Lily didn’t need a Trust at all.
Lily’s assets consisted of a few small bank accounts, an IRA at a brokerage firm and a modestly priced condominium. She had already named beneficiaries on her bank accounts and IRA, so these assets would avoid Probate when they passed to her heirs. The only asset that would be subject to Probate was her condo.
Lily has a good relationship with her kids, so she can title the condo in their names. Sometimes there can be a gift-tax issue when transferring ownership of an asset to a child. I almost never recommend adding a child’s name to your home, but in this case it makes sense and she shouldn’t incur any tax liability.
Another option for Lily was to set up a Living Trust on her own. There are a number of off-the-shelf computer programs that provide all sorts of legal documents, such as wills, powers of attorney, contracts, and Living Trusts. Trusts created using this software may not have all the special features of those costing $2,000, but most people don’t need them anyway.
Anne and her husband in South Carolina set up a Living Trust this way. They used an inexpensive software program to put together their Trust. It’s critical that you have an attorney review it when you’re finished. Their local attorney reviewed it, made sure everything was as it should be and only charged them $100.
If you are able to do this, then there isn’t any reason not to have a Living Trust. Even if it is to handle the transfer of your real estate at death, the time you take now will make things much easier for the loved ones you leave behind.
There are, however, several situations where it pays to go ahead and have a professional draw up a Trust for you. These include your estate being worth more than $1.5 million, having children that are handicapped or disabled, or having children from a previous marriage.
Professional help should be sought if you want to have incentives to financially motivate your heirs or if you want them to receive their inheritance over time instead of all at once.
Estate: Don’t Be Left Holding The Bag
Ned almost lost the farm that had been in his family for 8 generations! We’ve all heard that ‘The Devil is in the details.’ It is especially true when it comes to estate planning. Make sure you don’t make the same mistake Ned did.
Ned and Nellie Mae were in their early 80’s. Even though they had been happily married for over 30 years, they each had children from a previous marriage. About 10 years ago they became concerned about the amount of estate taxes that would be due on the family farm when they died. They’d heard the nightmare stories about losing the farm to Uncle Sam and they wanted to make sure it wouldn’t happen to them!
So Ned went to see his local attorney. He told the attorney about their estate tax concerns and also that he wanted to make sure the farm went to his children–stayed in his family–instead of going to his stepchildren when he died. Well, the attorney told Ned what to do and, obediently, Ned and Nellie Mae implemented that plan over the next 9 years.
The attorney’s advice sounded good, but the Devil is in the details! And the attorney missed a few details that left Ned holding the bag.
The result was that if Ned had passed away, his share of the farm could have gone to his stepchildren instead of his daughters–the very thing he was trying to prevent!
The attorney’s plan was also supposed to reduce the amount of estate taxes that would have to be paid, but because the attorney missed one small detail it would be as if the plan had never happened, leaving a $750,000 tax bill! They followed a plan for 9 years and were right back where they started!
Fortunately, I was able to help Ned and Nellie Mae get the chaos that had become their estate plan quickly and easily sorted out. With the help of a competent attorney, Ned and Nellie Mae now have the peace of mind that what they want to happen, will happen.
Their estate taxes have been drastically reduced, possibly even eliminated. Just as important, Nellie Mae’s children will get her portion of the estate and Ned’s children his. The farm that has been in his family for 8 generations will stay that way for a few generations more.
To their credit, Ned and Nellie Mae did everything they were supposed to. They were proactive in recognizing that they needed to take action to reduce their estate taxes. They knew they needed legal documents in place to dispose of their estate according to their wishes, minimizing any conflict between the children.
They sought out an attorney to help them. They followed the attorney’s advice and did what they were supposed to. So what went wrong and how can you avoid making the same mistake?
The only mistake Ned and Nellie Mae made was not working with an attorney that specialized in handling complex estates. Their attorney was a generalist. Being in a small town he did a little bit of everything, legally speaking.
Just like in medicine, it is hard for any attorney to be an expert in all areas of the law. You may have a family doctor, but if you need a heart transplant they will refer you to a cardiac specialist. If you have severe foot problems they will refer you to a podiatrist. If you have hemorrhoids…well, never mind, you get the picture!
Ned and Nellie Mae’s attorney knew in general what they should do, but since he wasn’t an expert in the area of estate planning he missed a crucial detail.
It’s the same way when it comes to handling all of your financial affairs. For all but the simplest cases, you should be working with someone who specializes in the areas you need help. Work with a competent professional that specializes in your situation.
Cash Flow Planning for Solo Professionals
You’ve heard it a million times – cash can make or break a business. Lack of cash flow planning is the reason why many businesses fail. In fact, many PROFITABLE businesses fail because of cash flow issues. Without adequate cash, you can’t pay your bills and you can’t make plans for your business.
So… what is cash flow planning? Cash flow planning is projecting your future cash inflows from sales, services, and loans, and comparing them to your future cash needs (suppliers, salaries/wages, loan payments, taxes, etc.). The difference between the two is your net cash flow.
Why is cash flow planning so important? Cash flow planning can help you identify problems down the road, and fix them before they occur. It can also help you make decisions such as should I attend that conference I’ve wanted to attend, should I buy the new computer I’ve been wanting, or do I need to work extra hard this month to avoid a cash deficiency next month?
The first step in planning your cash flow is knowing where you spend your money! Solo entrepreneurs need to have a good grip on both their personal and business spending, as most solo entrepreneurs rely on their business income to meet personal finance goals (i.e., pay the bills!). So, you should track both your personal and your business spending, although I recommend that you keep them separate (that’s a topic all by itself).
What’s the best way to track your spending? You can use pen & paper, spreadsheets or a software program. The best method for you is the method that you will actually use on a regular basis.
You should project your spending for at least the next 12 months so that you include annual and other periodic expenses. If you are experiencing a cash flow crisis, you should track & project your cash flow on a weekly basis, instead of monthly.
If you are an existing business, you can project your cash flow for the next year by reviewing your expenses for last year. If you are a new business, you will need to estimate your start up costs in addition to regular operating expenses.
Start up costs include inventory, legal expenses, advertising, licenses & permits, supplies, and many more costs that you may not have thought of. To research startup costs you should contact your local Small Business Development Center, contact a SCORE counselor, join groups of similar business owners, and read as many books or articles you can find on the subject.
To improve your cash flow, you should:
1. Complete the first 3 steps. You have to understand cash flow planning, track your cash flow, and project your future spending needs before you can improve your cash flow.
2. Create best and worst case scenarios and create appropriate responses to both scenarios. For example, if your best case scenario is to increase sales by 50%, how will you use the profits? Will you put the profits back into the company by investing in new equipment, training, etc.? If your worst case scenario is a drop in sales by 50%, how will you continue to cover your monthly expenses? By planning for the best and worst case scenarios, you’ll be ready for any situation.
3. When estimating your future income, realize that some people will pay late, and account for that fact in your projection.
4. Charge what you’re worth. Many businesses, especially service professionals, under-charge when they are first starting out. This is a great way to go out of business. Make sure you are charging what you’re worth, and remember you’re in business to make money, not to give your expertise away for free.
5. Watch your business spending. Focus on the value the item brings to your business, and avoid lavish spending (i.e., do you really need the fastest, newest computer available?).
6. Don’t hire until necessary. Consider using virtual assistants or temporary employees before hiring permanent employees.
7. Give incentives for early payment for products and services. On the flip side, chase down invoices the minute they’re late. Charge interest or late fees to encourage timely payments.
8. Update your projection regularly. Your cash flow plan will change frequently as your business grows. You may want to update it weekly when you first get started, then switch to monthly once you’ve got a good handle on your cash.
Remember - whether you are a new or growing business, your cash flow projection can make the difference between success and failure.
Estate: Do You Need A Trust Or Foundation?
Trusts and private foundations aren’t just for the rich and famous like Warren Buffet or Bill Gates. Nowadays, even people of modest means are realizing the great benefits trust and foundations can provide. Read on to see if you can, too.
There are many different kinds of trusts and foundations, but they all share a common element–control. Using them, you can control what happens to your assets while you are alive, in the event of incapacity and for generations to come.
For instance, a trust is highly recommended if you and your spouse each have children from a previous marriage and you want to avoid any conflict when one of you passes away or becomes incapacitated. A trust can be just the thing if you are concerned about a child losing their inheritance in a divorce. And in today’s litigious society, trusts can be used to shield assets from lawsuits. A trust can be as simple or as complicated as you need it to be.
Foundations have many similarities to a trust. The main difference, though, is that foundations are designed specifically for charitable, religious, educational, scientific or literary purposes. Like a trust, a foundation allows you to control how the assets are invested, who they are distributed to and when. Plus, there are tax benefits for transferring assets into a foundation that aren’t available with most trusts.
If you expect to leave several hundred thousands of dollars in assets to charity, a foundation may be right for you. That’s especially true if you want the assets invested and each year’s earnings distributed to a special cause.
There’s more involved in setting up a foundation as compared to a trust. They also require more work. Accurate records must be kept and informational tax returns must be filed. For those with much smaller contributions, it may be easier to donate the money or assets to an existing organization as opposed to forming your own.
But it may be easier to donate a significant amount than you think. You might have a life insurance policy that you’ve had for years that you no longer need. Instead of canceling it, you can name your foundation as the beneficiary. If fact, life insurance is a great way to not only provide the initial funding for a foundation, but also to help it increase in size over time.
I mentioned tax incentives. Appreciated assets like real estate or stocks can be transferred into a foundation (and certain charitable trusts). That way capital gains taxes don’t have to be paid and you still get a tax deduction for the contribution. The result is that your charity receives more money than if you sold the asset, paid the taxes and donated the remainder.
There are different versions of charitable trusts. Some allow you to donate an appreciated asset, get a tax deduction, and receive an income stream for life. When you die the remainder can be used by your favorite charity. Another version is similar but the charity receives the income stream during your life and your heirs receive the remainder at your death. This can be beneficial if you have investment property that has greatly appreciated, you need income and you don’t want to pay all the taxes.
In can cost thousands of dollars to set up a trust that allows you to avoid probate and protect your child’s inheritance from a lawsuit. Foundations can be even more expensive. But they don’t have to be.
If you are comfortable doing research on your own and are willing to take the time, you can set up a trust and/or foundation on your own very inexpensively. Legally, you can serve as your own attorney and draft your own estate documents. There are many sources that provide templates. If your situation is straightforward, all you have to do is fill in the blanks.
For those with more involved situations an experienced attorney is recommended. Even if you do it yourself, it’s not a bad idea to have an attorney review it. Lastly, a trust does nothing for you unless you transfer assets into it. Don’t forget that step or all your work will have been for naught.
The Best Investment Advice and Stock Picks for 2006
Everyone is trying to give advice on what to do with your money. There are numerous shows, infomercials, etc… Many charge a lot of money and make huge promises and then you find out it was a scam, bad advice, etc… I am going to show you how I averaged 187% returns on all my investments last year and over 500% for the last 3 years. I will tell you how to prosper in 2006 and make it your best year ever. And the best thing is I won’t charge you a penny. This is for real and all my advice is easily verified. Make 2006 your best year ever!
1. Fire your commision based financial planner. Get a fee-based financial planner (look them up on Google). Commission based like Prudential, American Express, Allstate, etc… are only going to show you products that give them fat commisions. In otherwords you will not get the help you really need. And a lot or all of your earnings will be negated and squandered on these heavy commissions. You need a non-biased financial planner who will find you the best investments regardles of what company has them. Fire your commission based financial planner.
2. Never ever buy whole life insurance! It is basically a big money maker for the agent (commissioned financial planner) - it is their highest commission product - why do you think they push it so hard? Two words are all you need to remember - TERM LIFE! Buy term for twenty years. You will save a ton and it is dirt cheap! Put your life in gear and you won’t have to worry about anything after those twenty years. Remember term life good - whole life bad.
3. Learn to stop impulse buying. If you can’t afford to pay cash don’t buy it. Tear up your credit cards except for one emergency card. The only purpose of a credit card is to make huge profits for the bank or store that gave you that card. If you have debts get a plan together to get them paid off. A fee based financial advisor can help you with this. Remember, accessories don’t make the man, owning your own home and being financially independent does.
4. Take 10% of your disposable income and invest it - pay yourself first - it works. If you can arrange for your employer to take it out of your paycheck or otherwise make it automatic that is best. If you don’t see it, you won’t miss it. If your employer has a 401K program max it out. Especially if they have a percentage match contribution - thats free money. $50 here and a $100 there may not seem like much, but it will compound fast. And the larger your investments get the more they will make. Ther rich learned that they can only earn so much themselves, but their money can gro to the point where it will earn far more than you could ever earn. Get started saving and investing.
5. Switch your auto insurance to Progressive - Regardless of what the commercials say they are the lowest price, best service, and best deal - period! Do you think your local agent and those paid endorsers work for free - they get paid from your higher fees and commissions (it has to come from somewhere). Remember it adds up - an extra $200 - $800 saved per year from your insurance invested correctly will be worth $20,000 really fast.
6. Invest in DRIPs - Direct Reinvestment Plans. Many of the top companies have these and it allows you to invest for very low or no trading fees (some even give you a discount so it actually ends up paying you just to invest - I like that). Exxon Mobil (XOM) and Cross Timbers Oil Co. (XTO) are hot oil DRIP’s. XTO has experienced a more than 1200% growth in the past 3 years. Buy it. You need to have a good, solid play in the oil, energy sector. They don’t have the best dividends, but with their growth who cares? I also recommend buying natural gas - Piedmont Natural Gas (PNY) is the steadiest, safest player in this field. Great dividends and rock solid - it won’t give you the gains of XTO but will average out some of the peaks and lows. Buy it. Remember to get diversified so find a financial DRIP like Banco Popular (BPOP) - a great spanish bank ripe for a takeover that pays great dividends.
7. For instant diversification, steady growth and solid dividends use an ETF (Exchange Traded Fund). Unlike mutual funds, etf’s can be traded throughout the day just like stocks. Choose an ETF that tracks a major or minor stock index (for better diversification). I recommend IJR - it provides the best growth and dividend return of the ETF’s. Buy IJR. Remember do not put more than 20% of your investment portfolio under any one stock or ETF - diversification is the key to amassing great wealth.
8. Learn that no matter how hard you work for someone else you will never be paid what you are worth. You will only be paid what you are worth when you realize this and decide to go into business for yourself. Do your homework first and pick something you like that can be turned into a moneymaker. Remember 70% of new small businesses fail mostly due to poor planning. You will make mistakes, we all do, but its how you interpret those mistakes and what you learn from them that makes the difference.
9. Whatever your religion, pray and read your bible. If you trust and have faith in God you will be provided with what you need. The steps above will provide you with financial freedom and wealth. If you let him, God will provide you with understanding, happiness, meaning to life and less stress. Studies have shown that people who pray and have faith are healthier and live longer. What good does all that money do if you can’t enjoy it and help others with it? Volunteer. Be a Big Brother. Help others out. Once you have become successful please help others to do the same. Pray, read your bible and volunteer.
There you have it - if you follow this advice you will undoubtedly be well on your way to financial freedom and happiness. And there’s more easily proven and helpful advice here than in all those infomercials and books you see on TV like no money down realestate, the greatest vitamin, paytrading, etc… Fire your commissioned investment advisor. Stay away from Whole Life and only purchase Term Life - you will save tons.Learn to pray and read your bible. Do yourself a favor and print this out. If you care about your friends give it to them. Put it in your email lists. If you believe in helping others and making the world a better place then pass it on to everyone you can. These ideas and stock tips will provide you and everyone else with solid gains for years and a greater chance at financial freedom. The best thing is it didn’t cost you a cent.
