As the cost of these policies continues to increase, more and more carriers are leaving the Long Term Care Insurance business.
 

 
Years ago most companies would provide retirement plans that guaranteed an income for the rest of your life. These plans were called Defined Benefit Pension Plans and when you retired they gave you a percentage of your income for the rest of your life.
 
Many of these types of pensions have gone away, replaced by a 401K where employees put their money into the stock market for the most part. Some people still have another type of defined benefit pension plan in essence, called Social Security. When they retire at age 65-67, they get social security income which continues for the rest of their lives, but this usually represents only a small percentage of what is their required annual income.

What we are suggesting is that people build their own defined benefit pension plan that will create guaranteed income for the rest of their life. For instance, if you need $100,000 a year to live on and social security provides $20,000 of that, we want to try and backfill that other 80% with guaranteed income. We do this by taking some of the money they have in the market or sitting in cash or CDs etc., and putting it into products that help people have the confidence to enjoy their retirement and not feel that their money is going to run out.
 
The challenge that many people face as they approach retirement is determining how much yearly income they will need and for how long they will need it. When people try to figure this out, they usually approach it in a mathematical way. For instance, let’s say that a potential retiree wants to generate an income of $300,000 a year. Mathematically, if they had $5 million in assets earning 6% every year, then they could take out $300,000 each year. Seems simple, doesn’t it? However, that kind of mathematical calculation creates a really dangerous potential result and here is an example of why.
 
In the 26 year period from 1969 to 1995, the Standard & Poor’s 500 Index showed average yearly earnings of 11.3%. If we took our $5 million retirement nest egg, and withdrew our $300,000 a year based upon that S&P Index, even increasing it every year to hedge against a 3% inflation increase, we would not only have been able to take out all that money but the portfolio would have grown from $5 million all the way up to $25 million. That has to do with the fact that in the early stages of that 26 year period, the market did very well.
 

S&P Earnings 1969-1995

S&P 1969-1995 Earnings Reversed

Taking care of first things first, our prior blogs talked about the importance of the Protection and Savings levels of the model. In the fifth and last part of our Financial Organization series, we deal with the third level, Growth.

Growth

Investing is a good thing, right? We should be investing our money to make more money shouldn’t we??

The answer to those questions is “yes”, but people put money into securities before they have established adequate liquidity and that can create a problem. In the Savings area we have already talked about the importance of putting aside funds for things like emergencies. We also discussed the importance of having money that’s not in securities, or other growth oriented investments such as real estate, which if needed, could force you to sell in a down market causing you to lose some of your wealth.

We believe there should be a progression and that progression is protection first, then adequate savings, then putting your money into growth oriented vehicles such as:

• Bonds
• Stocks
• Mutual Funds
• Managed Investment Accounts
• Real Estate
• Investment Real Estate

These growth vehicles are attractive from the perspective of long-term overall yield as well as the potential tax benefits they have. But first, let’s examine some of the common mistakes we see in the area of Growth.
Concentration Risk

Many people build their income around employment with a specific company. Not only is their income tied to that organization’s success but a significant part of their wealth is attached to that single entity. Their retirement account, stock options, investments are all tied to that one company. We call that concentration risk – having too much money concentrated into the stock of the company they work for.

Another type of concentration risk is when people fall in love with a particular security. While reviewing our clients’ asset allocation we sometimes find they have a lot of money tied to the success of one organization. Again, not only is their income attached to it but their savings, assets and investments. This is potentially very dangerous to their lifetime goals of growing while also protecting their wealth.

Emotional Decision Making

Most people have no overall strategy for making investment decisions. Traditionally people invest emotionally; when the market is high, they invest in the market and when it goes down they sell, which is the exact opposite of what they should be doing.

When many of our clients had market corrections to their accounts in 2008 and 2009, our advice was to stay the current path or buy more in the market. But most people felt the pressure to sell which is exactly what we want to try and avoid.

We also have found that many people have no idea how they will react to those times when the pressure is on and the market is down. Often they feel this overriding sense of “Let me get out.” The big challenge for those who did get out is what to do now because since then the market recovered quite a bit and they lost that period of time. When you sell you also have to figure out how you are going to get back in. We want to guide our clients to avoid those mistakes so that when they look back they don’t say “Wow, I shouldn’t have done that.” Avoid the emotions of investing.

Reinvesting All Dividends and Capital Gains

Like in the savings blog, we find a similar pattern in the growth area where people reinvest all of their capital gains, dividends and interest, buying more of the same security or mutual fund, the effect of which is no movement of money. It also creates more concentration risk, more taxes, and a stagnant personal economy. Our philosophy is to help clients move money from one place in their financial model to another picking up more benefits, lowering their risk, lowering their taxes and protecting the wealth that they have. Money in motion stays in motion.

Mortgages

Mortgages can be an excellent tool and help in the purchase of real estate, but selecting the wrong type of mortgage can leave you with a debt that is higher than the value of the property. As mortgages and real estate started skyrocketing, many people took too much money out of their homes, got interest only mortgages, or took out variable interest loans that went up. Many of these people really got hurt by what happened when the real estate market went down. In retrospect, many people took an aggressive position toward purchasing real estate and/or used home equity and then found their debt/loan was higher than their property’s worth. They were challenged, as the mortgage rates went up, to make their payments. The result of this, unfortunately was that some people had to resort to short sales or were forced to move out of the home they loved. These are the things that we want to help people avoid so that they position themselves in a way that will save them from looking back with regret.

What we offer people is a way to assess their present situation, look at what they’ve done with their protection, savings and growth and position themselves in an objective way that makes sense. It all starts with gathering all the information and seeing how your financial world stacks up in this model so that you have a clear picture and can be objective in seeing if you have the right stuff in your financial plan.

In our last blog, we talked about the logical process of dividing each of the three model areas, Protection, Savings and Growth, into nine sub-areas, or “drawers”. We also listed all the common errors in the 9 Protection Drawers.

In this blog, we are going to take a look at the common mistakes in the Savings drawers.

Savings

Inadequate Savings

The first thing people need to do is save adequately and in such a way that the money will be “liquid”. We recommend between 15-20% of the adjusted gross income until the savings amount equals 50% of your adjusted gross income. For example, if a family has an adjusted gross income of $100,000, we want them to have saved in “liquid” accounts such as bank accounts and money markets, $50,000. Once that is done, they can start saving in other places like retirement plans, college savings programs, etc.

Diversification

Unfortunately, we find that most of the time as soon as people can save money they immediately put it into their retirement account which may cause problems if they suddenly need that money. Let’s say they lost their job or have need of money for the purchase of a piece of property. Taking the money out of a retirement fund can be costly in both penalties and taxes. So diversification and liquidity in savings is very important.

Wrong titling

The third issue that we find is that many times there is very little thought put into titling accounts. Having an asset titled jointly versus individually, joint tenant with rights of survivorship versus tenants in common, individual ownership or having it owned by a trust or some other entity can protect you against lawsuits and things like that.

Reinvesting all the interest

Another common mistake is that people will many times put money into an account and leave their dividends, interest or earnings in that account rather than taking that interest/dividend and applying it to some other part of their financial model.

Compounding the tax

Leaving interest/dividends in the account has another negative side effect. As you compound the growth of an account you also compound the growth of the taxes that you pay which is just another eroding factor to wealth.

Too high a percentage of savings placed into retirement plans, which are not liquid , and have some tax disadvantages

As mentioned above, we have a population where a large percentage of people are putting a tremendous amount of money into retirement plans and then they may not have the liquidity they want to access the money. Recently we had a client that needed access to the money in his pension plan. He is under 59 ½ and he doesn’t have a provision to borrow on it so he is in a position where he would have to pay the penalty of 10% and also all the ordinary income taxes in order to withdraw that money.

College saving

We also find that people save money for college in a way that basically will eventually move the account off their balance sheet and move it on to the college’s balance sheet. We want to guide our clients toward using other people’s money to potentially pay for college. How we position our assets could either allow us to avail ourselves of more programs whether it be scholarships, needs based or non-needs based or certain loans. By having money already set aside in our children’s names or gift accounts or 529’s we might disqualify ourselves from some of those other options.

How safe is your Wealth?

The proverb goes “A “Picture is worth a thousand words” and the truth of that proverb is very clear once we’ve created the game board or visual picture of our client’s financial model.  As explained in our last blog, the model breaks down people’s wealth into three areas, Protection, Savings, and Growth and creates a visual representation of these areas.  It’s a very logical process, dividing each area into nine sub-areas, or “drawers”.  Once established, we open up and look inside each one of the 27 drawers to see what is in place, and what may need to be updated and/or changed.

In this blog, we are going to list some of the most common shortcomings of the nine Protection drawers.

 
Car Insurance:

• Liability limits to Low
• Deductibles to low
• Uninsured and Underinsured Level not at same level as the other liability limits on the policy
• Split Limits rather than Combined single limits

Homeowners Insurance:

• Liability Limits to Low
• Deducible to Low
• Policy does not guarantee the replacement costs for the dwelling or the contents
• No or limited coverage for art, furs, and jewelry
• Failure to keep records of contents, by keeping receipts, taking pictures or a video and storing those things in a safe place away from the house

Excess Liability Insurance:

• Failure to have any
• Limits to low

Disability Insurance:

• Failure to own any
• Relying on employee sponsored plans
• Relying on Government benefits such as NY State DBL or Social Security
• Amount of monthly benefits too low to maintain standard of living
• Benefit period to short

Medical Insurance:

• Failure to own properly designed medical and long term care Insurance
• Trying to purchase Long Term Care insurance  after you are ill and/or uninsurable
• Not owning Long Term Care Coverage in the proper amount – too small of a daily benefit for your area , and too short of a benefit period
• Not having an inflation adjusted Long Term Care policy

Social Security:

• Not checking your statements to confirm you are being properly credited for the tax you have paid
• Expecting benefits ( especially for younger people) that may not be paid out
• Expecting It to provide the security for your family in the event of a death, disability and retirement

Wills and Trusts:

• Not having one
• Having an outdated one
• Not having the will coordinate and integrate with the titling of assets, beneficiary designations as well as the Life Insurance that the family may own
• Failure to update these legal documents and instruments- as the laws continually change

Ownership Agreements:

• Not strategically thinking of ways to limit liabilities through proper titling
• Keeping everything Jointly
• Setting up legal documents that require assets to be titled specifically to make those legal arrangements work.  For instance, to avoid probate , many set up Revocable Living Trusts, however in order to make it effective, all assets need to be titled in the trust

Life Insurance:

• The amount of personal coverage is inadequate for the client’s family financial security or estate planning goals.
• Failure to match the product with the client’s needs/objectives.
• There has been no investigation to see if the client’s employer, business, or practice can provide insurance on a more efficient basis.
• Policies are not going to last the entire lifetime of the insured
• Beneficiary designations are not correct
• The client’s estate is named as beneficiary
• Failure to name at least two “backup” beneficiaries
• The policy proceeds are payable outright to minor children or grandchildren or to handicapped or emotionally immature or financially irresponsible individuals.
• Part, or the entire amount, of business-owned life insurance proceeds is payable to the insured’s personal (individual) beneficiary.
• Ownership is not correct
• Policy, if term, is not convertible to a permanent form
• Policy, if Universal Life,  is not funded adequately and will lapse before life expectancy
• Policy is not managed and reviewed at least every three years
• Adequacy and appropriateness of the client’s business insurance policies and/or buy-sell agreement not reviewed at least every three years.
• Policy, if variable, is not reviewed managed and updated , to switch funding and where the policy values are invested
• Spouse coverage is not adequate
• The client owns all the insurance on his or her life.

Do your protection drawers contain any of these problems?? If so, please give me a call to find out how to improve and optimize these areas of your financial plan.

In our last blog, we talked about emptying and organizing the financial “junk drawer” into a working model. Once that is done, we have the beginnings of helping people move from where they are to where they want to be in life. It’s the starting point; the baseline. When you go to the doctor you get an EKG which becomes the base line for all changes to medications and treatment protocol. Improvement can be measured from that baseline which makes it a very scientific approach. In that same way, we create a financial baseline from which changes, protocols and improvements can be determined.

Our approach is to help our clients see a picture of their current financial world through what we refer to as the game board. Try to imagine playing chess where you have all the pieces but don’t have the board. How do you plan your strategies for winning without being able to see the whole picture? We have fun helping people make smart decisions so they can move around the financial game board without being “checkmated.”
Once we establish the game board and recreate our client’s present position, we can help them see what challenges or problems they have. As with the medical example cited above, there is a very scientific approach to our work. The game board structures a client’s assets and decisions into 3 areas:

Protection: We begin by evaluating all areas of protection because it is vital to shelter assets, income, and life from unpredictable events and eroding factors. This means evaluating the important details regarding your vehicle and property insurance; liability protection; disability and medical insurance; government benefits; possible enhancements your attorney could make to your wills and trusts; and evaluating your life insurance. The objective is to maximize your protection at a minimum cost.

Savings: Next we concentrate on the savings area (rather than your investment portfolio) because you should first build a solid foundation. We recommend between 15%-20% of a person’s gross earnings be saved. Once that savings goal has been met, we want to be sure that they build up at least 50% of their adjusted gross income in liquid savings. It is critical that you first have enough liquid savings to enable to you to cover emergencies and take advantage of wealth-building opportunities. The objective is to increase your rate of return, reduce risk, increase liquidity, and minimize your current and future taxes.

By coordinating and integrating your protection and savings first, your overall plan is better positioned to work under a variety of circumstances. Now we can concentrate on:

Growth: When you have accomplished your goals for liquid savings, you are ready to change your focus to your investments, which may include stocks, bonds, mutual funds, real estate, collectibles, and your business. We evaluate your current rate of return, risk, and taxes with the goal of coordinating and integrating the growth component with your protection and savings, reducing risk, minimizing taxes, and increasing future income to allow you to be financially independent.

Our philosophy is that by creating a proper lifetime strategy, clients can assure themselves of the best result and that their wealth is going to be better protected from eroding factors by having their money in motion. We utilize strategies such as the financial game board to allow clients to visualize the overall picture and move money from one part of their model to the next. The movement of money helps make their money work harder as opposed to leaving their assets in one place.

So when it comes to the game of wealth management, you really need to have a board in order to know the best way to proceed. Wondering what your financial game board looks like? Why don’t you give us a call and let us help you see the picture and develop your winning strategy.

When we sit with clients initially, we find that most people have what we call the financial “junk drawer.” What does that mean? It means they don’t have an organized approach to making money decisions. Their decisions are made throughout their lives, at different times, with different objectives, sometimes with different advisors, and all coming from different places and biases. What they usually ends up with a feeling of disorganization, a lack of a cohesive overall strategy, and a feeling that things are out of control or unmanageable.

Everyone accumulates products and assets over time, such as:

• an IRA
• an investment account
• bank accounts
• insurance policies
• retirement plans
• employee benefits
• real estate

The list can go on and on.

You have all of these things, but just like when you go into your kitchen and open up that junk drawer looking for a particular item, you sometimes you can’t find it. You have staples, rubber bands, pens, extra keys, glue, the take out menu for the Chinese restaurant, the instructions for the juicer all thrown in the drawer and not organized or easily accessible.

What we do is empty out the financial “drawer” and place all the financial decisions, products, amount of dollars, premiums, contributions and savings into a financial model that gives you the opportunity to see your entire financial picture on one piece of paper. By doing this, we establish a baseline of your current personal economic picture and begin to see that picture from a macro economic point of view.

For example, maybe you don’t have a will. The model will highlight that. Maybe you’re not saving enough money. The model will highlight that. Or you have products in there but they are not the right products because the financial environment has changed; the laws have changed. Now:

• You need a new will.
• You need a different type of investment.
• You need a different type of insurance product

Gathering all the asset information and financial documents that make up your financial picture is the critical first step but also the hardest part for many. Once organized and gathered, we can begin the process of assessment, analysis, and improvement that will move you from where you are to where you want to be.

So, let us help you organize your junk drawer into a planned model and create the personal economic picture that is best for you.

—- Many policy owners, insured’s, and trustees are not aware of the risk that the policy they own, will not remain in force for their entire life.

—- People manage their Investments, they  manage their real estate – but when it comes to their Life Insurance – they buy it, and then rarely look at it again. More often than not, this “hands off” approach will create an under-performing policy that can expose them to significant financial risks they haven’t even considered.

One of our services is to help create awareness of where our clients stand, in relation to managing their Life Insurance assets, and provide options that will enable them to make much better decisions about how to manage those assets.

We’ve found that the main problem that many people have with Universal or Variable Life Insurance, is often a lack of awareness of how their policies work,  and as such many are simply not aware that their policies, could end up under-performing, or may not even work at all, at least – not as they expected when they first acquired them.

An example is that many contracts do not have guaranteed death benefits, yet many people are not aware that the policy they are counting on, may not even pay out in the event of their passing.

Think of a policy in the form of the Bathtub

What goes into it, is premiums & interest, or policy earnings that will be credited – that is like the faucet pouring the water into the policy.

The drain – is the charges that come out of the policy – the cost of insurance (mortality charges), and policy fees and expenses. As an individual gets older the drain (the mortality costs) get exponentially higher and higher.

This creates the perfect storm, as interest rates are low and have been for some time, and people are living longer – these policies that were purchased for the purpose of lifetime coverage – now are in extreme danger of lapsing.

Leaving you in the bathtub with no water, coldly exposed to having a failed policy that might have negative effect on your financial, business, or estate plan.

We can help, depending on your situation, policies, and financial goals –  there are always options and choices for how to resolve this problem. Here are a few examples: We may be able to adjust your current policy, consider alternatives, or even potentially exchange your current plan for a new one.

There’s no right or wrong way to solve the problem – the most important thing – is that you don’t ignore the problem. Please do not close your eyes to what may very well cost you millions of dollars.

If you have questions or concerns about managing your life insurance, or what you can do to keep your policies performing as you intended
Don’t hesitate to give us a call at 631-262-9254

Jonathan Gassman

Jonathan is Director of Wealth Management at G&G Planning Concepts, Inc., one of the leading wealth management firms in New York City. He is a uniquely talented man who runs his own CPA firm which was started by his grandfather about 100 years ago when the tax code was first being developed. His father developed the firm with some tremendous clients from all walks of life, corporate executives, CFOs, CEOs, CIOs, and business owners of small, closely held corporations.

Jonathan grew up in a CPA culture and environment and as he grew with the firms clients he yearned to do more than just provide tax compliance work for these clients or people. As their client base matured and began to amass more wealth, he asked them what more could we do to help them beyond just merely preparing their income tax returns? Their answers helped drive the firm in creating a financial advisory business. Jonathan sought out becoming a Certified Financial Planner and a Chartered Advisor in Philanthropy so that he would be best suited to deliver the highest quality of service that these very high end clients wanted and desperately needed.

About ten years ago I met Jonathan while conducting a seminar on how and why accountants and CPAs should consider offering financial services and financial planning, and money management to their clients etc. and there began a relationship. That relationship now has matured over the years into a collaborative partnership with clients. The results are astounding for clients when you have a team of advisors from different disciplines all working to serve one common dream for the client. A good quarterback is key to fulfilling the clients’ goals and aspirations. Jonathan and I continue on the path of collaboration, coordination and integration. We believe that when you make a decision in your financial life it is always at the expense of another decision and having the ability to see how one decision effects another is so valuable to the people we serve. We bring that comparative analysis, that scientific viewpoint, so our clients can see things from an opportunity cost basis. For example:

• If I choose to put my money here, then I can’t place it here.
• If I did a shorter amortization on my mortgage it would cost me more money and therefore maybe I can’t invest as much into my business, or other investments

Every decision is at the expense of another and when you bring in other disciplines, other people, they see more choices which is ultimately what we want to create for our clients; more options, more choices, more flexibility because at the end what creates disappointment or stress is not having choices in life, feeling that it is only going to be one way. We strive to avoid that feeling of helplessness for our clients by getting them to see things from a perspective where they have options and choices, and that they are doing good planning, planning that allows them to take care of first things first.

 As we have talked about in the past, our idea of first things first is foundational. First you have protection – - you make sure the foundation is built – - proper car, home, liability insurance, disability, life insurance, wills, adequate savings, liquidity, proper titling of assets, proper legal documents, etc., so that you are protecting the wealth that you are simultaneously building. Once the defense has been formulated, then and only then will you be able to properly move forward for the offense. And that is why the process of collaboration, coordination, and multi-disciplinary practices adds tremendous value for the clients we serve.