retirement secrets

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retirement secrets

  1. 1. i
  2. 2. CONTENTS ForewordBy Bob Eubanks…………………………………………. v. IntroductionWhy Financial Security And Peace Of MindAre Attained By Only Few Americans ………………….. vii. Chapter 1People Don’t Plan To Fail,They Simply Fail To Plan………………………………… 1 Chapter 2The Lost Secret Of Planning…………………………….. 4 Chapter 3Six Ways To Lose Or RunOut Of Your Money……………………………………… 11 Chapter 4The Truth About Inflation…Numbers Don’t Lie……………………………………… 19 Chapter 5What The IRS Doesn’t WantYou To Know! .................................................................. 37 Chapter 6First Things First: How ToKnow Where You Are Today ………………………….. 46 Chapter 7Goal Setting Made Easy: How ToSet Goals That Can Be Reached! ……………………… 57 ii
  3. 3. Chapter 8How Much Money Do You NeedTo Retire So You Never OutliveYour Money? ………………………………………….. 61 Chapter 9The Biggest Mistakes RetireesMake And How To Avoid Them ………………………. 76 Chapter 10How To Protect Your AssetsFrom Being Taken Away IfYou Or A Loved One NeedsLong-Term Medical Care ………………………………. 93 Chapter 11How To Protect Your AssetsAnd Your Family When YouPass Away! ……………………………………………. 107 Chapter 12How To Protect Your AssetsFrom Being Taken Away IfYou Get Sued! ………………………………………….. 123 Chapter 13Investment Made Easy (HowTo Make The Right ChoicesWithout Any Hype) …………………………………… 136 Chapter 14The Truth About Insurance ……………………………. 156 Chapter 15Putting It All Together: GettingYour Plan Started Today ………………………………. 183 Chapter 16How To Choose A Team OfAdvisors Who Will Work For YOU! ………………….. 187 iii
  4. 4. ConclusionHow You Can Simply AndQuickly End Your MoneyWorries Through Careful Planning ……………………… 195© 2010Notices:Due to the fact that the financial landscape changes so swiftly, some examplesyou see in this book regarding issues that include, but are not limited to:interest rates, prices, inflation rates, rates of return, tax rates, and so on may bedifferent than the current conditions as of the date you are reading this book.Any numbers or figures used in the examples are merely used to be illustrativein nature, and are not intended to be relied upon for your financial situation.ALL RIGHTS ARE RESERVED. No part of this book may be reproduced ortransmitted for resale or for use by any party. All reproduction or transmission,in any form or by any means, electronic or mechanical, includingphotocopying, recording or by any informational storage or retrieval system, isprohibited without express written permission from the publisher. Any slightsof people or organizations are unintentional.While all attempts have been made to verify information provided in this book,neither the Authors or the Publisher assumes any responsibility for errors,inaccuracies or omissions, nor for any actions taken by readers regarding theirfinancial, tax, legal, accounting or any related situation. If advice concerningfinancial, tax, legal, accounting or any related matters is needed, the services ofa qualified professional should be sought. This book is not intended for use as asource of financial, tax, legal, accounting or any related advice. Any referencesto any persons or businesses, whether living or dead, existing or defunct, ispurely coincidental. iv
  5. 5. Foreword BY BOB EUBANKS, 3 TIME EMMY AWARDWINNING HOST OF THE NEWLYWED GAME. Hi, I’m Bob Eubanks. If you’re like me as you’ve gotten older, you probably have had concerns about the years to come. You may be thinking about whether or not you will have enough money to last you during your retirement years. Or, what if tragedy strikes and you or your spouse need to stay at a long term care facility? How will you afford it? Or worse yet, how would you survive, financially speaking, if your spouse died? These are just a few of the many obstacles you may face that have the potential to wipe out your nest egg. However, with a littleplanning and a better understanding of the rules of the game, your retirementyears could be golden. As Benjamin Franklin once said about getting rid ofyour worries, “An ounce of prevention is worth a pound of cure.”This book has been thoughtfully crafted to give guidance and share wisdom forthe pure benefit of retirees and people planning for retirement. While readingthis book, you will be shocked to realize that there are many financial pitfallsthat exist in the world of retirement today. Some snafus are governmentimposed while others may come from negligence or mistakes from trustedadvisors. But regardless, this book shines the light on some of the dangers thatlurk in the dark, giving you the tools and knowledge to make the proper plansto protect yourself and your family. It is written in plain English so you don’thave to be a lawyer to understand it. The stories and examples throughout thebook leave you with a clear understanding of what can go wrong and how youcan avoid some of these mistakes. The Risky Business Of Retirement!In 1964, I borrowed $25,000 on my house in order to bring The Beatles to theHollywood Bowl Concert (their first West Coast Performance). Back then that v
  6. 6. was a HUGE amount of money. But, that was an investment that really paidoff for me. It was the beginning of a 20-year concert promotion career thatincluded The Beatles, The Rolling Stones, Barry Manilow, Elton John and BobDylan, just to name a few. Plus, I even have to attribute landing the position ashost of the Newlywed Game to this bold beginning.In those days, taking big risks was scary, however, I knew even if I losteverything and had to start over… I still had my youth. But as we get older andwiser, we tend to be more worried about money and our health.There are so many financial pitfalls that can spoil your retirement andpotentially send you to the poor house! As you read this book you will have abetter idea of where you are financially. And, if you are not where you want tobe, you will have discovered many options to get you there.So grab yourself a cup of coffee or tea and find a cozy spot to start yourjourney.Happy Reading.Sincerely,Bob Eubanks vi
  7. 7. INTRODUCTION WHY ONLY A FEW AMERICANS HAVE ATTAINED FINANCIAL SECURITY AND PEACE OF MIND Our definition of “financial independence” is prettysimple. It means: that you can basically do what you want and not worry about the money!That’s a vague, general definition but, in fact, that’s a pretty good definition.For example, if you’re able to live on a $3,500 per month income in today’sdollars, pay your taxes and bills, and do the things with your life that you wantto do, whether it be vacations, playing golf, hobbies, visiting your kids andgrandkids, then we would define you as being financially independent.There are lots of problems and issues you face every day, which we’ll talkabout throughout this book that can jeopardize your financial independence.For example, if you’re living on an income that meets your needs now, and youjust retired…you won’t have the same situation facing you 5, 10, and 15 yearsdown the road because of inflation and taxes. We will explain that in moredetail later in the book.We’ll also talk about the startling fact that a top quality, private nursing homecost $250 a month in 1964, and now costs over $6,000 a month!Which is an average of better than 24 times more expensive 45 years later!!This translates to an annual inflation rate on nursing homes of about 8% peryear! We’ll talk about what that fact, and others like it, might mean to you laterin the book.For now, talking about this concept of financial independence, you have torealize that being “rich” means a lot of different things to a lot of differentpeople. vii
  8. 8. For instance, the family we just talked about that can live on $3,500 a monthand feel “rich” because they can do what they want to do and are financiallyindependent, might seem like a pauper’s life to another family. On the otherhand, some people who hear of the retiree with $3,500 a month might think thatperson is extremely “rich” because they only receive $800 a month of pensionand Social Security income.The family that is used to living on $20,000 a month before retirement wouldfind the thought of living on $3,500 a month unbearable because of theirlifestyle, and their psychological make-up.It’s all relative. There are no rights, no wrongs. It all depends on you, yourpersonality, your lifestyle, your goals and how you want to live your life.With all that said, let’s get back to why so very few Americans achievefinancial independence, and have the true financial security that allows them todo what they want to do.From our perspective, and from years of working with all the clients we have,particularly in the retirement category, it is our opinion that the single biggestproblem and the Number One cause of people not achieving their financialgoals is people haven’t done the proper planning for their financial future!!!We think the whole problem stems from the educational system we have in thiscountry, even though many of you may not have been in school for a number ofyears. Our educational system is based on teaching people subjects, many ofwhich are irrelevant. Many of you may have been taught Latin, for example, ortrigonometry, certain versions of American History, etc.But when and where did anyone teach us how to take care of ourselves andplan for our financial future? Who taught us how to deal with the real financialissues that face us today?We have spent a lot of time getting an education, and to this day, other thanwhat we have learned on our own to become a professional in the financialfield, there is no education given at any level about how to plan for yourfinancial future.It doesn’t matter if you’re a blue collar worker, a business owner, a topcorporate executive…or anything in between, we are not taught how to takecare of ourselves financially. viii
  9. 9. We are not taught how to plan for taxes and inflation. We are not taught abouthow to figure out what we need to do to make our goals become possible. Weare not taught about how to deal with the reality of paying mortgages, bills, taxproblems, wildly fluctuation stock and bond markets, cash flows, budgeting,insurance, long-term care, health care costs, and on and on and on.Nobody teaches this anywhere in our school systems. We don’t care if it’s highschool, college or advanced degree programs, you are not taught about thesecritical areas. Even students currently in business classes are not getting thiskind of information.The bottom line is this: You’ve got to plan your financial situation as carefully,and with as much attention and energy as you would plan a vacation!We think everyone would agree that planning a vacation, while fun andentertaining, is not as critical as planning your financial future.For example, when you go on vacation, you know where your destination is,where you’re leaving from, and usually you’ve explored alternative ways to getthere, and then you figure out what choices you’re going to make based onthose options. If you follow your plan, your vacation will almost assuredlycome off smooth and successful.Are you doing the same thing with your money?Are you taking stock of where you are today? Are you taking a look at whatgoals you really want? Are you developing different strategies and options thatmight help you get there and then picking the ones that work best for you? Areyou constantly monitoring and updating your planning processes for thechanging tax laws, investment markets and government regulations? Are youworking on this with the same energy and vigor that you do for planning avacation?We think most people don’t plan like this, and that’s why most people don’tachieve financial independence.In our opinion, it’s really not all that complicated from a theoretical standpoint.The details, of course, can become very complicated. And we’ll move throughthem as we go through the book and review lots of examples for you. ix
  10. 10. The primary and most important thing to understand is that you’ve got to planfor your financial future. If you’re entering retirement now or soon, or ifyou’re just starting out, it doesn’t matter. The best time is RIGHT NOW!Not tomorrow, not next week, not after the kids visit, not when your CDsmature, not when you’re a year older, not when your mortgage is paid off, notwhen the elections are over…or whatever. The best time is RIGHT NOW!We’ll give you all kinds of information, tips and techniques on how to help youplan and what you should be aware of. Keep in mind this is not a do-it-yourselfbook, but it is designed to help you when you work with financialprofessionals. So you’ll have the proper knowledge to know what questions toask so you can make educated decisions.Right now, we want to set the stage for this book by making sure that youunderstand that to be in the group of the few Americans who are trulyfinancially independent (and if you are there already, in order to stay there) youdo need to plan, and do everything you can to make sure your planning is doneproperly.The best planning will allow you to have:knowledge of where you are today’;knowledge of where you want to go;knowledge of the choices, options and alternatives that are available to you,how they work, and the pros and cons of all those choices;then you can make educated decisions on which options and choices you aregoing to take from a planned professional approach as opposed to a helter-skelter, random, wild, uncontrolled, chaotic, environment where decisions aremade based on intuition, luck, advice from your brother-in-law, magazinearticles, watching the Today show, watching CNBC, etc. Where everything isdone from a shooting-from-the-hip, no-plan, no-understanding of theintegration and how all the financial areas tie together approach!All that input is good, but it is only a very small part of the real story. The realtrick is to understand all your options, do the planning, and then make youreducated decisions.If we impart nothing else to you from this book, we hope you will understandthis very true saying, “People don’t plan to fail, they just fail to plan!” x
  11. 11. As a final note, let us just briefly outline the areas that are tied together, andshould be coordinated so that you will be aware of what you need to look at.These are the areas that need to be addressed so your whole plan fits togetherand so that what you do in one area doesn’t inadvertently cause problems inanother area!Those areas are:• Cash Flow/Budgeting• Income Tax Planning• Estate Planning• Asset Protection (Protecting your money and estate from being lost in a lawsuit or being taken by other nasty creditors or Medicaid, etc.)• Retirement Planning• Tax Planning• Savings Planning• Insurance/Risk Management Planning• Education Funding (If applicable)• Business Planning (If you either have or want to start a business)As you can see, there are a lot of areas tied together in your financial life and itis really impossible to do the best job…without making sure each area has beenevaluated, understood, and comprehended, then building a plan with all of themconsidered. So what you do in one area is complementary and beneficial to allthe other areas.This message is not one you will learn anywhere else. Most accountants,financial advisors, etc. do not understand how this works.Most people are more than happy to sell you financial products or financialservices in a vacuum. The tax preparers give you advice on your taxes. Theinvestment advisor or stock brokers will give you advice on investing, and theinsurance person will give you advice on insurance, and on and on.Everything being done independently without coordination and integration.Each area looked upon only by itself and not how it fits into the whole pie.All the ingredients must be worked on together if you want the “pie” to comeout tasteful, peaceful and secure, just the way you want it. xi
  12. 12. Let me give you a couple of brief examples of what we mean, so you can seewhat we’re talking about clearly.Roz and Ken had lots of financial problems. They were in their 60’s, in goodhealth, and had retired a few years earlier. They had a typical mess. The kindof mess we see all the time. They had:• Four life insurance policies that they had owned for years, and had no idea why they owned them, or exactly what they provided.• A bunch of CDs from different banks, with all different maturities, rates, etc., al owned as joint tenants. (As most of their assets are, including their home.)• A paid-for home.• An IRA that was rollover from Ken’s 401(k) plan at work with several mutual funds inside.• A Medicare supplement policy.• A collection of assorted stocks they’d picked up over the years, and large chunk of stock Roz inherited from her mom (that her mom had bought 35 years ago).• Homeowners and auto insurance from two different agencies.• Money set-aside for their grandchildren’s education, in CDs, held in joint tenancy with their kids.• Some savings bonds Ken accumulated at work years ago.• A pension income with Social Security.• A Will that was drawn up when the kids were little, over 25 years ago.• Some debts like a couple of car loans, credit card bills, remodeling expenses, etc.While this list may not appear to be a “mess” at first look, let me assure you, itis a mess.They have no idea if anything they own is right for them.Stuff has been bought or decided without any regard for how every piece fitsinto the “pie.”• They have no idea if any of their insurance coverages are correct, if their policies are the best value, if they’re paying too much, etc.• They have no idea if their investments, CDs, etc., are earning enough to take care of them now, and in the future.• They don’t know if their “nest egg” and fixed income will last throughout their expected lifetime. xii
  13. 13. • They have no idea if their income taxes are as low as they legally could be.• They don’t know if their IRA distributions are set up right.• They don’t know if they are subject to any excess accumulation penalties or even what these penalties are.• They don’t know if they should sell or keep their stocks, or how to reduce or eliminate the large amount of taxes that will be due if they sell Roz’s mom’s stock.• They don’t know how, or if, they could pay for a nursing home stay.• They don’t know if they are protected from losing their assets if they got sued.• They don’t know how much money they should be putting away for their grandkid’s colleges.• They don’t know if the way they own assets (joint tenants) is good or bad.• They don’t know what would happen if one of them became incapacitated.• They don’t know if their estate would actually be distributed the way they want.• They don’t know the true risks they are taking with their investments.• They don’t know if they should keep the house paid-for, or refinance it, or use other money to pay off debts.• They don’t know if they should have living trusts, estate tax trusts, etc.Lots of stuff they didn’t know. All because they made decisions without seeinghow their whole plan for the future fits together. For example, they didn’tunderstand that each decision they make affects many other areas of theirfinancial situation!• If they change their investments; their taxes, cash flow, retirement income, estate set-up and more will be affected!• If they refinance their home: their cash flow, taxes, insurance and more will be affected!• If they sell Roz’s mom’s stock: their taxes, cash flow, estate planning and more will be affected!And so on.Everything they do affects everything else. It’s like an engine in a car. Everygear, belt, valve, etc. has to work in concert with every other component. Ifany one part doesn’t work right, usually the entire car shuts down. You can’tdrive a car with its distributor cap malfunctioning, or with a tire that’s out ofair. xiii
  14. 14. It all has to work together. And YOUR MONEY PARTS HAVE TO ALLWORK TOGETHER AS WELL!!!!Just like Roz and Ken, everything you do is important; every decision has to beviewed as how it fits into the whole of your money.Make sense?If you get nothing else out of reading this book other than an awareness of theimportance of coordinated planning, and how to think differently about yourmoney and the planning that must be associated with money, then we wouldhave done a good job! (Hopefully, you’ll learn lots more than that, but if not,we will still feel good knowing you got a new mind-set that will help you forthe rest of your life!)So, as we move ahead to the details and chapters in the book, we want you tounderstand that everything is based on a foundation of planning, planning,planning.There is no substitute for planning! There is no bigger secret than planning!In our opinion, proper planning is the Number One Financial Secret, the bestkept, best hidden, least understood, and most misunderstood secret of all. Ifyou just plan, and plan often, and update your plan, you’ll be ahead of 99% ofthe game and ensure that you do end up among the few Americans who arefinancially independent!So, with that note, let’s move ahead and start going into the details on how tohave a secure and peaceful retirement. xiv
  15. 15. Chapter 1 PEOPLE DON’T PLAN TO FAIL, THEY SIMPLY FAIL TO PLANSometimes old clichés get a little worn, and people feel theyre trite andinsignificant. However, the other side of the coin is to understand why theybecame clichés in the first place. People use them over and over because thereis simply a lot of truth to them.As we said (a cliché, if you will): People dont plan to fail, they simply fail to plan.Whats the truth that lies in this cliché? Let me give you an example and see ifany of this sounds familiar.Bert and Charlene wanted to see if we could help them plan for theirretirement.Now the fact that they had both recently turned 65 and wanted to start planningfor their retirement might sound a little odd to you. In fact, its just the opposite.People like Bert and Charlene come in all the time wanting to plan for theirretirement...at the exact time they are retiring.They had met in high school, been married for 42 years, raised three children,and had seven grandchildren. They had known each other their entire adultlives. Now they finally reached the point of retirement age and they wanted tobe sure they were okay, financially speaking.Let me ask you a question.Do you really think its a good idea to start planning for your retirement exactlywhen you turn age 65 and are ready to retire?Bert and Charlene didnt plan too much for their retirement before they retired.They just kind of assumed everything would work out. They had managed toget by financially their whole lives by having things sort of "work out." 1
  16. 16. They figured out how to get two kids through college (their youngest daughternever went to college but did require financial help with her baby when herhusband left her) and theyd always managed to take care of financialemergencies like dental braces, broken furnaces, a new roof, etc.So there they were. Charlene retiring from her job as an assistant to thesuperintendent of a school district, and Bert, who owned a pharmacy in townand had sold it to his cousin. They just sort of assumed everything would workout fine. Between the two of them, they had over $412,000 saved up inretirement plans. Their home was almost paid-for, and they had very few otherdebts. For Bert and Charlene, having $412,000 in one place at one time seemedlike a heck of a lot of money. Now that they had retired they decided to comeinto our office to do retirement planning. (As we go through the book, well tell you all about how to plan for yourretirement and go into much more detail about how to analyze your financialsituation and help you figure out what to do based on case studies like Bert andCharlene’s.)When Bert and Charlene were presented their plan, they became upset. Veryupset. Why? Well, because when the plan showed them that based on theirgoals, how much money they wanted to have, and the things they wanted to do,their retirement nest egg wouldnt last them more than 9-10 years.Somewhere around age 75, they would be basically broke and living on SocialSecurity and Charlenes small pension. They were very angry and wanted toknow how anyone could tell them such a stupid thing.Anyone would know that $412,000 was a ton of money. They worked theirwhole lives to save up all this money, and it should be able to last them throughretirement. And who were we to tell them they couldn’t make it?We are not being critical in any way of Bert and Charlene. But, Bert andCharlene made a very big mistake. They made the assumption they could startplanning their retirement the day they retired.That’s much like planning your wedding on the day of your wedding. Mostpeople are familiar with the concept of planning for a wedding, and no one intheir right mind would consider getting up on Saturday morning, making somephone calls and hoping everything went well that afternoon.Bert and Charlene made a classic mistake. 2
  17. 17. They didnt plan to fail, they simply failed to plan.Its been our experience that Americans procrastinate more about financialdecisions than about other things they need to deal with.We will generally be very diligent about planning for all sorts of things in ourlives, but when it comes to money, we just simply don’t do it. We find all sortsof reasons why we cant:"Well start planning when the kids are older..." "Well start planning when I getmy new job...." "Well start planning when we get back from vacation ...""Well start planning when the house is finished…” "Well start planning whenthe kids are done with school ..." "Well start planning once the car is fixed..."“Well start planning when I get my degree..." "Well start planning once..."All these reasons, all these excuses, all these rationalizations. And, the bottomline is planning for your financial future is probably one of the most importantthings you can do with your time.As you read through this book and listen to the stories and case studies andthink about your own life, please understand there is one thing we want you toget out of this book if nothing else: You have to plan for your financial future, because nobody is going to take care of you... but YOU! The government wont take care of you, and your company wont take care of you. The only person who will take care of you...is YOU! 3
  18. 18. Chapter 2 THE LOST SECRET OF PLANNINGYou know, its funny. The more things change, the more they stay the same.Here we are in a new millennium in America, the greatest country on earth. Avery sophisticated, technically oriented country. It’s a country whereadvancements are being made every day and where progress is alwaysexpected. Where moving ahead is always the goal.And yet, were not much different in many ways from the ancient Babyloniansand Egyptians who also had the same goals and the same underlyingfoundations of progress and expectations.Its our belief, after studying people for all these years, reading about ourcurrent culture and the way we think, reading about cultures from the past andancient history, that people are still people.A lot of the things you think about, and we think about, are the same thingspeople thought about 5,000 years ago. Things like making a better life. Makingthings bigger, better, safer and stronger. Things like taking care of your familyas your primary consideration. Things like having a loving relationship withyour spouse. Things like making money. Things like gaining power or prestige.And so on.In a lot of ways, there really isnt anything new under the sun.When you really look at it, the countries and cultures that have been successful,that have made an impact on the world, used the one technique and secret thatwe seem to have lost in our world.This secret is so full of common sense that it begs to be used over and overagain because it works so well. Its one we seem to have forgotten and dontspend much time or energy doing anymore.What is the secret? We talked a little about it already. Its planning. Yes, thelost secret of planning. 4
  19. 19. Let me ask you a question. The ancient Egyptians built the pyramids. Ancientcivilizations built those gigantic structures without any of the sophisticatedtools or technology we have today. Do you really think they walked out intothe desert one day, looked at each other and said "Lets build some pyramids!"and then started building?Now no one knows for sure how long it took them to build the pyramids oreven for sure how they were constructed. But the one thing we do know is thatthey planned for a long, long time before they began moving those heavystones around the desert.Theres really nothing new under the sun. The things that we do now, correctlyand incorrectly, are the things that people have always done correctly andincorrectly. In our opinion, one of the things people do correctly is planning,and conversely, one of the things people do incorrectly, is not planning.Everything you do in life revolves around some sort of planning.What about just planning your daily schedule? Most of us dont make it througha day without having some sort of plan about what were going to do. We mightdecide a week ahead of time, a day ahead of time, or maybe that morning. Wedont just get up and do things.We have some sort of idea what were going to do first and how we will dothings. Where were going to go. When were going to go. How were going toget there. What were going to do when we get there and when were going tocome back. With whom were going to meet and when were going to meetthem. Your whole day and life revolve around planning.You plan your trips to the grocery store. Most people make a list before theygo. When you dont make a list, dont you come home with more than youreally wanted or needed, and/or maybe you forgot things? The best way to goto the grocery store is to first plan your trip, make a list, then go and followyour plan. Dont you usually come back with exactly what you need andwant...versus just showing up at the store and coming home with too much ortoo little?We even plan little things like getting gas in our car. Well make a mental notethat were low on gas and plan when were going to get the gas, i.e., "Id betterstop for gas before I go into the office" or "I have enough gas to make it intothe office but Id better make sure I fill up before I head home." Those are allplans. That’s planning. 5
  20. 20. When you go on a vacation, you plan everything before you go. You knowwhere youre going, how youre going to get there, when youll return, how longyou will stay, etc.You plan your meals. You plan what time youll eat, what youll eat, how youregoing to make it, where youre going to buy it or where youre going to get itfrom, when youll bring it home, who will share with you, who wont be there,how much it will cost, and so on.We could go on, but we wont. We think we have made the point. Planning isintegral, central and necessary to everything that we do in life. It is truly thelost secret.What about our money?Most Americans literally spend less time planning out their financial futurethan they do a trip to the grocery or hardware store. All the little details that wethink about in our daily activities and plan for are ignored by most of us whenwe deal with our money.If we try to do it, we get sidetracked, or we procrastinate, or we do somethingof more immediate consequence, and it never really gets done. Most Americans, no matter what incomes we have or what we do for a living, will end up not being able to retire on the standard of living that we had before we retired.The most complicated things are usually the most simple.It really is simple to plan for your future. But in order to plan properly, first youmust understand that you need to plan. We dont know any other way around it.There is no secret, no technique, no method of doing things we have ever foundthat works better than planning.If you look in the dictionary, the word "planning" is defined as: "To form ascheme, a method for doing, achieving, etc." Something we do for virtuallyeverything we accomplish in our lives. Everything except for our financialfuture, that is. 6
  21. 21. When you think about it, it just makes so much sense to take the time to planfor your future.There are three steps you need to plan for the future that we will cover in thisbook.1. First, finding out where you are today,2. Second, where you want to go, and,3. Third, building a plan to get there.Its that simple and that complicated.To start out, review and think about the following commonly asked questions:1) What is my net worth?2) Where are my assets?3) Why do I own these assets?4) How are they titled?5) How much will these assets earn before I retire?6) If Im already retired, what should I do with these assets?7) How much do I need for food, clothing, shelter, travel and other non-investment expenses?8) Where does the money come from to pay for these expenses? (Savings, income, social security, etc.?)9) How much will these expenses cost tomorrow?10) How much will they cost ten years from now?11) Will my current income keep up with inflation and the cost of living?12) What tax bracket am I in?13) What income tax planning has to be done to minimize taxes in my tax bracket?14) What would I want to happen if I got sick, mentally incapacitated or died in the near future?15) What have I done in regards to estate tax planning?16) Do I have any unrealized capital gains that may have to be paid someday?17) What taxes do I need to consider when investing?Good questions, dont you think? Can you honestly say you can answer them?Let me give you an example of how planning works and how important it is tohelp you make informed, educated decisions. 7
  22. 22. John and Mary Smith are both 57 years of age. They have no children living athome, and they are currently in the 28% tax bracket. They have $100,000($130,000 originally) left on their mortgage. Their monthly principal andinterest payments are approximately $864 based on a 7% mortgage rate. Theycurrently have $150,000 in CDs earning 4%, which represents most of theirinvestments.Would John and Mary be better off paying off some or all of the mortgagetoday?This is a common question, and most Americans dont really know how tofigure out which makes the most sense for them. Although every family has adifferent situation, lets look at some of the facts in this case so that we can helpJohn and Mary make an informed decision.John and Mary have always been told that paying off their mortgage early wasa bad idea because they get a tax deduction on the interest. However, thecritical question most people forget to look at is, "At what point does theinterest deduction continue to make sense?"Lets look at some simple facts: The Smiths make around $6,000 per year inearnings on their CDs. However, after paying 28% income taxes, they end upwith only about $4,300. In addition, the Smiths currently pay $10,400 in yearlymortgage payments. Out of that amount, approximately $7,600 is deductibleinterest. At a 28% tax bracket this means that the Smiths can save $2,128 (28%of $7,600) in taxes.The real calculation is done by comparing the after-tax rates of return on bothof the options, and then deciding. The CDs earn 4%, but after paying taxes at28%, they really only earn 2.86%. Therefore, the Smiths investments aregrowing by 2.86%. Their 7% mortgage rate is really 5.04% after taking intoaccount that the interest rate of 7% is tax deductible.So, they are making 2.86% after taxes on the CDs, and losing 5.04% after-taxeson the mortgage! They are losing 2.18% every year! (2.86% CD net returnless 5.04% mortgage cost = -2.18%.) Since they are paying more than they aremaking, it would make sense that they increase their net worth by using the CDmoney to pay off the home.In essence, investing in the home and paying the mortgage off would actuallybe more profitable! 8
  23. 23. This can be quite confusing because even though they saved money in taxes,they had actually lost money! This is because they paid more in interest thanthey made.On the other hand, if the Smiths had been in other investments instead of theCDs and were making 11%, the numbers would look different. Now their 11%taxable return would produce 7.92% in after tax return, which is higher than the5,04% after tax cost of the mortgage, providing actual growth because theyreearning more after tax…than the cost of the loan after tax!So, in this example, theyd be better off not paying off the mortgage becausethey are earning more than the after tax cost of the loan.If this is confusing, dont worry, most people find tax rules confusing. Theimportant thing to remember is that with a little knowledge and some goodadvice the average American could save thousands of dollars each year withproper planning.Your financial situation will always have a major impact on your family andyour familys well being. Its very hard to separate our lives from our money.As we move through this book, lets keep in mind how important this issue ofplanning is. You will see everything we talk about, everything we teach,everything we counsel people on is centered on planning, planning, and moreplanning.It is truly the lost secret of the ages. Once you understand where you are, whereyou want to go and what options and choices you have on how to get there, youcan make better decisions. Decisions based on a complete understanding of theoptions that you have acquired through planning.Youll be in the best possible position. Youll be making choices based on anunderstanding of the options, the pros and cons, and know that youre workingin a logical and scientific manner...as opposed to just doing things based onemotion, salespeoples pressure, your brother-in-laws sage wisdom orsomething you heard on CNN.No one can guarantee success. No one can guarantee you wont have financialproblems. No one can guarantee things will go perfectly. It would also beridiculous for us to make those statements.What we can do and say with confidence is: 9
  24. 24. Planning will give you the best chance to reach your goals!Planning will give you the best chance to deal with problems and changes inyour life and in the economy. Planning will provide you the best chance toachieve the peace of mind and contentment we all are seeking.Sometimes we feel we are a lone voice in the wilderness crying out saying,"Please people, plan your future, plan your finances, take the time to do it!"Many financial advisors are more than happy to sell you products based onwhat they want you to buy, and/or sell you products based on the commissionsthey earn.Some firms talk about financial planning, but very few really take the time tofigure out what your situation is, and how to help you make the best objectivechoices based on the best options available for you to reach your goals.Were going to teach you more about that in this book.Our focus has always been based on planning and we hope that yours is, too.Think about it. Planning is defined as:"to form a scheme, a method for doing, achieving, etc."There are three steps to plan for the future:1) Find out where you are today.2) Decide where you want to go.3) Build a plan to get there.If you leave this book with a better understanding of how things really work,and how to think correctly about planning for your own future and well-being,you will be well on your way to a peaceful retirement! 10
  25. 25. Chapter 3 SIX WAYS TO LOSE OR RUN OUT OF YOUR MONEYNo retiree ever wants to run out of money. No retiree ever wants to lose hismoney. No retiree ever wants to be dependent. Unfortunately, all of thesethings happen far too often.Most retirees havent been advised, or learned how, to set up a financial planthat will allow them to protect themselves from any of the six major ways onecan lose or run out of money. Most folks aren’t aware of these until theyexperience them.These six areas continue to cause problems for retirees. Problems that can bereduced or eliminated through proper planning. As we go through this book, wewill be discussing these various areas in much more detail, and how you canprotect yourself from them through knowledge and planning.For now, we want to introduce these six dangerous items, have a briefdiscussion about them, and set the stage for later chapters in the book where wewill discuss them in more detail.In our opinion, the six dangers causing the most problems for retirees, andcreating the greatest chances for them to lose or run out of money are: 1. Taxes. 2. Catastrophic medical expenses. 3. Inflation. 4. Bad investment planning. 5. Lawsuits. 6. Passing away without having a proper estate plan.Any one, or a combination of these items, can wipe out an entire lifes savings,sometimes overnight! Were not trying to scare you here. In fact, just theopposite. This book is based on reality, and sometimes reality isnt pleasant.Many retirees learn far too late about any one, or all of these six items. Its ourjob in this book to help you be aware of them, and know how to deal with 11
  26. 26. them, so that there is as little chance as possible that they will affect yourfinancial security.We dont want you saying, "How could this happen to me?So we want to give you the tools, knowledge and questions to ask so you canavoid having to say that altogether.Now, lets briefly discuss the six items and how they can affect you and yourretirement security. 1. TaxesYou would think it would go without saying that retirees would want to pay aslittle tax as possible. That retirees would want to use every legal advantagesavailable to them to reduce their taxes. But that’s not the case.Most retirees that we see who havent done planning are paying more taxes thannecessary. Theyre paying maximum income taxes. Most retirees have theirsituations set up so that they dont take advantage of more than a few, if any, ofthe tax savings advantages that are available to them.Well go into more details about tax savings opportunities in Chapter 5, but fornow we want to make sure you understand you are not required to pay the mostamount of taxes possible. Its your right, and, in fact, one judge said its yourduty to learn about all the advantages available to you under the law and takemaximum advantage of them to reduce your taxes!Think about this. If you saved $200 a month in income taxes by rearranging your financial affairs, and invested that money at only 4%, over a period of 10 years, it would grow to a sum of over $25,000!Thats $25,000 of money that you would otherwise have squandered if youdpaid it in taxes, because once its gone, its gone. Wouldnt you rather keep thatmoney? Saving $200 a month in taxes is childs play for most retirees if, andthis is the big IF, they take the time to learn about the strategies they can takeadvantage of to save them money.Keep in mind that every year there are usually hundreds of changes made to theIRS rules! Theyve recently changed all kinds of laws on things like capital 12
  27. 27. gains, estate taxes and so on. If you don’t know how to integrate these changesinto your plans, you could easily make mistakes that could cost you hundredsor even thousands of dollars.We think it is an absolute shame to see so many retirees sending their hardearned money off to Washington on a one-way trip to never be seen again.Dont let taxes ruin your financial security. Make sure you keep this in mindwhen you read Chapter 5, and pay attention to the legal advantages andstrategies were going to show you for saving taxes. 2. Catastrophic Medical ExpensesThe health care crisis in America is real and out of control. The government hasbeen a major contributor to this crisis, and does not know what to do about it.But the fact that its a mess doesnt change your situation. It doesnt help you tosay its a mess and blame the problems on the government and insurancecompanies. You need to take care of your own situation.43% of the people reading this book are going to spend some time in a nursinghome, according to the U.S. government. That’s 43%. Almost half. (Source:New England Journal of Medicine.) In fact, with increased survival to age 65,the number of 65 years olds ultimately using nursing homes are projected todouble by 2020.You have got to plan how youre going to take care of your long term healthcare needs since the odds are very high that at some point you will either haveto stay in a nursing home, or require long-term care.Sure, your health insurance and Medicare will pick up most medical expenseswhile you’re in the hospital, but they wont pick up the bulk of the costs oflong-term care once you leave. In fact, Medicare pays nothing for long-termcare other than a limited amount for the first 100 days, and then only a smallpercentage of the people who apply for it actually receive it.Well discuss catastrophic medical expenses in more detail in Chapter 10. Wewant you to start thinking about the fact that the way the program is set up now,you are responsible for long-term care expenses, and other uninsured medicalexpenses not covered by Medicare or your health insurance.Just remember, nearly half of the people reading this book will spend sometime in a nursing home or require long-term care, which is currently running$6,478 a month on average (this is projected to be between $8,000 - 10,000 amonth within 10 years). 13
  28. 28. The laws are always changing! Its very important to get the proper legal and financial advice before implementing your retirement plan!Extended care, whether at home or in a nursing home, is unfortunately a fact oflife that needs to be addressed today. In order to protect yourself and yourloved ones from the catastrophic effects of outrageous medical expenses, it iswise to obtain the services of an expert. Dont make the common mistake ofthinking that you can interpret the ever-changing laws yourself.You either have to have a plan to change the way your assets are owned, get theproper insurance to cover this sort of expense, or take the risk of being wipedout. This is not a pleasant topic, but it must be faced and addressed head on.Long-term medical care is the Achilles heel in most retirement plans. Yet itneed not be if addressed early on. There are many new and creative plansavailable today that were not on the market a few years ago. 3. InflationWell go into much more detail about inflation in Chapter 4, but we just wantedto briefly mention that inflation in and of itself has destroyed more retirementsthan any other factor weve ever seen.As we just mentioned, about half the people reading this book may have tospend time in a nursing home. Thats bad. Whats worse is that inflation affectsall of the people reading this book. Inflation is defined as the "cost of thingsyou have to buy going up in price." Inflation is not going away, is not undercontrol, and can devastate your financial situation.Even though the government tries to downplay the role of inflation, from ourpoint of view, we cannot downplay it at all. Weve seen too many peopleoutlive their money, be forced to reduce their standard of living significantly,and depend on friends, family and charity to survive, simply because inflationtook what was once a comfortable fixed income at one point in their life...andturned it into a meager, if not unlivable, income as the years rolled by.Dont think for a second that just because the government says inflation islicked, that it really is. The rate of inflation fluctuates. And while the statisticsissued by the government say the inflation rate is under control, it is not okay. 14
  29. 29. For example, the government statistics say that inflation is running around 3%as of the writing of this book. But, when you look at how prices have escalatedon so many items that directly affect you, theres no way that a 3% figure isrealistic for the average American.Just look at what housing and gas prices have done in the past coupleyears…”It’s Crazy!”Prices go up constantly, and retirees must face the fact that they must plan theirretirement future with inflation as part of that plan in order to have a realisticchance of realizing their goals without altering their life-style, dramaticallychanging how they live, and/or facing the very real prospect of literally out-living their money.So, yes, inflation is a very real danger that will affect everyone, and one youdont have the option to ignore. 4. Bad Investment Planning This is another big problem area where we see retirees continuing to makemistakes. Mistakes and problems that often cause them great distress duringtheir retirement.Many people dont understand what investments are, or how they work. Mostpeople are not even sure if a CD is an investment. It can be very complicatedand confusing.Our purpose in this book is not to give you detailed, technical explanations ofdifferent investments. What we are trying to do is point out that if you plan forthe future and you have investment planning integrated with your otherfinancial planning, you will know what kind of returns you need to achieve tomake your plan work. Youll learn what options you have available to youthough the planning process so you can make educated decisions, diversifyyour portfolio, and have a truly solid investment plan that will give you the bestchance of reaching your goals!Of course, you need to establish goals first. Then you need to understand whatrate of return you need to earn to make your plan have the best chance ofworking, and then how you have to diversify to make those earnings possible.That can only come through planning. 15
  30. 30. Unfortunately, most people buy investments out of greed, and sell out of fear.They buy investments because they want them to increase in value and expectthat they will. If the investment drops in value, they sell out of fear sometimesat prices far below what they paid. This causes destruction of their net worthand their portfolios.Similarly, many people like to "wait" to see how high a mutual fund will gobefore they buy it. This kind of thinking makes no sense. Tell us one other assetthat you would buy where you wait until it goes up higher and higher in pricebefore you bought it. If you buy a car, dont you want to buy it at the lowestcost? Not the highest. Or, do you wait to see if the price increases, and thendecide to buy it?The stock market is the only market in the world where when the price goesdown, everyone “runs out of the store!” Investments only work if you buy low and sell high!Your portfolio must be diversified, and set up to meet your goals whileconsidering the risk that you are willing to assume. We will cover those risksin more detail along with more issues about investing in Chapter 13(Investment Choices Made Easy: The Right Choices).For now, we want to plant the seed that your retirement will be greatly affectedby how your investments are set up and perform. Investing improperly, buyinghigh/selling low, or making investment decisions for the wrong reasons willcause many sleepless nights, and theres no need for that. 5. LawsuitsMost retirees dont realize that lawsuits are a common plague, and can costthem some or all of their life savings. Many retirees wonder why they would besued. They might wonder, "Im not in business anymore? Im not in the workforce?," and so on. The answer is very simple.There are lots of ways you can get sued. Many of them are ridiculous andunfair, but, nevertheless, a fact of life. 16
  31. 31. Believe us, if you back out of your driveway and accidentally run over a childon a bicycle, you will be sued. If you spill coffee on your neighbors lap, youcould be sued. If you invest in your sons business and become a boardmember, you could be sued. If you are out in the world in any way today, youcan be sued.You must set up your assets properly. Know how your things should be ownedand how the titles on assets should be set up. And be sure that your liabilityinsurance is set up properly.One brief instant, one blink of an eye, one incident, can cause you to lose yourentire net worth and everything you have saved.Well talk about this topic in more detail in Chapter 12 (How To Protect YourAssets If You Are Sued).6. Passing Away Without Having Properly Set Your EstateThis is another area where we see families repeatedly making mistakes. Theydon’t realize the seriousness and importance of setting up an estate plan thatwill allow the heirs to receive the assets in the way the family wanted them tobe received. One that will minimize the taxes and expenses incurred upon theirdemise, and prevent the government from taking as much as half of the assetsin the form of estate taxes!Its bad enough that many retirees dont even have a will. And the ones who dohave a will, have one thats outdated. It doesnt reflect their currentcircumstances and wishes, doesnt contain provisions if they became disabledor incapacitated, and needs to be reviewed and incorporated with otherdocuments.Again, why go through all the trouble of saving and accumulating andmanaging your estate if, upon your death, the government and attorneys end upwalking away with half or more? And, your family has to wait for months oryears to receive the assets left after taxes? Or, having assets go to people thatyou never wanted the assets to go to?Again, planning is the answer. Planning is the key. Well talk much moreabout estate planning in Chapter 11 (How To Protect Your Family And YourAssets When You Pass Away).Now that weve stated these six dangers and discussed them briefly, we hopewere setting the stage for whats ahead. We hope were starting to get your 17
  32. 32. mind working on the many things you are doing...or not doing and how yourfinancial health can be in jeopardy.We hope we are provoking a lot of questions and thoughts in your mind suchas, "Am I set up properly? Have we done the right things? Do we know if ourwishes will be carried out? Do we have the best chance to beat inflation? Isour portfolio safe and diversified? Are we paying the lowest amount of taxeswe legally can? Will our financial plan allow for inflation and help us maintainour life-style without running out of money before we run out of breath!If you are asking yourself some or all of these questions, thats good. That’swhat this book is all about.So, think about it. And again, here are the six ways you can run out of money:1) Pay too much in taxes2) Incur catastrophic medical expenses3) Inflation4) Bad investments5) Lawsuits6) Poor estate planNow let’s get to the details. 18
  33. 33. Chapter 4 THE TRUTH ABOUT INFLATION THE NUMBERS DONT LIEThe subject matter of this particular chapter is not one that needs a great deal ofintroduction. Were talking about inflation or, another way of saying it is: thethings you have to buy go up in price over a period of time.Now there are all kinds of technical explanations of why inflation occurs. Thereare many scientific theories and economic models that explain how and whyprices go up. We can get this information from textbooks, financial journals,published articles and so on. Were going to skip all that stuff for this bookbecause the reality is that for you and your family... It doesn’t really matter why there is inflation. All you need to know is that it is there and understand how to deal with it.Its like trying to understand why and how the sun works, versus understandinghow to live your life while the sun is up, and how to live your life while the sunis down. In other words, how to deal with the fact that there is a sun. Thatswhat were going to cover in this chapter - how to deal with inflation.Theres a very important aspect of inflation that must be discussed. The issueof the government, and how the government relays information about inflationto members of the general public.Now, there are all kinds of opinions as to if inflation is created by thegovernment; how the government makes inflation worse than it would beotherwise, and all sorts of related topics.As we said a minute ago, were not going to get into that here. But we do thinkits important to understand the difference between what the governmentstatistics tell you about inflation versus the impact of inflation on your life.Over the past 80 years or so, the government has created indices that it reportsto us every month. These reports tell us how fast prices are going up. Back in1913, the government developed a measure of inflation called the Consumer 19
  34. 34. Price Index (CPI). The CPI is a government formula that tells the public howhigh prices have gone up on average in the United States over a months periodof time. It’s then converted to an annual rate of inflation.For example, the government might say that this month the CPI went up 0.4%(4/10 of 1%), which translates to an annual rate of inflation of approximately4.8%. They might also tell us that in May, inflation rose 4/10 of 1% for themonth, but because of lower figures in previous months, the average annualrate of inflation for this year is actually running at 3.7%, not 4.8% as you wouldassume.Now, we are not sure exactly how important or relevant it is for you tounderstand how the government calculates the Consumer Price Index. In theinterest of keeping this book informative and not boring, we wont go into thedetailed formulas of how this is done.We think the simplest explanation, the one that will serve us best in this book,is that the government takes various categories of products and services of alimited nature (in fact, there are a select number of categories they report on)and then takes the average increase in prices on those items, using its formulas.These include housing prices, oil prices, and so forth.So, whats the problem with the CPI? First of all, since the government usesonly a limited number of items in calculating the CPI, the result doesntnecessarily reflect the reality of what youre facing when you buy things on adaily or regular basis.For example, housing prices may be down on the nationwide average, whichwould bring the CPI down, but that may be the only sector of our economy thatis going down when other areas of our lives may be increasing substantially incost.If youre not buying a house, the fact that housing prices went down has nobearing on your life, and what you pay for everything else.This happens all the time. In fact, I can remember one month when a reportsaid that inflation was running at 0.4% (4/10 of 1%), which would translate toabout a 4.8% annual rate of inflation. But, they cautioned, we shouldnt pay toomuch attention to this, because if you took out the jump in food and energyprices, the index would have only been 0.1% (1/10 of1%)! 20
  35. 35. This can be somewhat misleading. By telling us to ignore the fact that gas andfood prices went sky high it would appear that the increase in the cost of livingisn’t too bad this month.However, in order for that number to be meaningful in our lives we need to nothave bought food or gasoline that month! To us, this is misleading. The costs ofeating and driving cannot be ignored. Another problem with the CPI is that because it is based on a formula that wasdeveloped years ago, it doesnt necessarily mean the formula is correct, nordoes it takes into account all the variables that we face today as consumers.Yet because so many things that we think about in our financial lives revolvearound how the government reports inflation to us, this can cause seriousproblems.Lets take, for example, the story of Grandma Hannah.Grandma Hannah was a retiree in 1965. When her husband passed away he lefther with a relatively modest pension from the railroad, a Social Securityretirement benefit, an almost-paid-for home, and a modest life insurance policy.In 1965 when she retired, she was receiving a little over $400 a month. She hadabout $15,000 in the bank, and a mortgage payment of only $97 a month. Hercar payment was only $21 a month and her other fixed expenses such as food,utilities, insurance, health costs, etc. only ran about $175-200 a month.When she retired, Grandma Hannah actually had a small surplus cash flow eachmonth (around an extra $50 a month), money in the bank, and a very secureand peaceful retirement in front of her. Or so she thought!But then things really changed. Grandma Hannah was in great health, and tenyears after her retirement at age 75, she still had basically the same $400 amonth coming in, but her expenses had increased to the point where she wasrunning a negative cash flow (spending more than she took in).Her savings had decreased a bit because she had gone on a few vacations andhelped a few of her grandkids with some education costs, paid for part of awedding, and so on.But, she was still basically okay. She moved into a retirement home. Hermonthly expenses were up to around $700 per month. This negative $300 per 21
  36. 36. month in cash flow didnt seem too bad since she had funds in her bank accountto cover the shortfall.Now we move ahead ten years to 1985. Grandma Hannah is 85, still in reallygood health, and in financial trouble.Her bank accounts are at zero. Shes living in the retirement home, still indecent health but failing, and having to depend on the grandkids to put inmoney each month to pay her bills and take care of her.If she needed anything, the family had to buy it for her. The $400 a month shewas getting at age 65, which seemed OK at the time, was nowhere near enoughat age 85!! Grandma Hannah committed the sin of enjoying good health, and believing that she would be okay in retirement. In fact, inflation had wiped her out.Now, lets talk a little bit more about how Grandma Hannahs story relates tothe governments so-called measure of inflation, and the reality of whatGrandma Hannah faced and what we are all facing as well.According to the U.S. Department Of Labor, Bureau Of Labor Statistics, since1965, inflation has averaged 4.78% per year.Thats what Uncle Sam says.Lets take a look at nursing home costs.If you want to talk about a difference between what Uncle Sam says, and whatreality says, lets see how nursing home costs have risen. (We briefly discussedthis in the Introduction.)In 1964, the monthly cost of a top end, high quality nursing home was about$250 a month. (No, thats not a typo. You are reading that correctly.)$250 a month in 1964. Over, $6,000 a month in 2009 (depending on where youlive). In some urban areas, the costs exceed $10,000 a month! Lets use theaverage cost of $6,000 a month for discussions sake.Nursing home costs have risen at an annual rate of 8% per year! This is morethan DOUBLE what the government says inflation is running! 22
  37. 37. Do you ever hear the government talking about these facts:1. At the same rate of increase, a nursing home stay will cost $155,424 per year(based on the 8% yearly increase in cost) only ten years from now.2. You will be responsible for those expenses.As the graying of America continues (That’s the Baby Boom generation gettingolder), the pressure on prices at quality long term care facilities will continue toincrease causing the rates to increase at an even higher rate than those we justdiscussed.As we said earlier, the cost of long-term medical care is truly the Achilles healin most of the retirement plans that we see today. Well talk more about thislater. For now, we just want you to be aware of how bad REAL inflation is, andwhat it might mean to you!Lets take college education as another example. In 1976, the cost of a four-year, public, state university in most parts of the country was around $2,000,maybe $3,000 in more expensive schools. Today, according to the PrincetonReview, a New York-based education services company that regularly analyzesdata from approximately 650 colleges and universities estimates the averagecost of tuition in 2009 to be $14,333 for in-state, and $25,200 annually for out-of-state. And the average private college is $34,132 annually.The cost for a 4 year in-state college is up 37% from what it was just 10 yearsago. Nothing added or improved, yet the cost continue to skyrocket.Same college, same dorm, same books (maybe updated versions), but basicallynothing better or different. If you look at the Consumer Price Index andmultiply 4.78% out over a 30-year period, the price of a college should only beabout $8,000.Lets take another area like your home. In 1968, the median price of a home inthe U.S., according to the National Association of Realtors, was $20,100.Today, the median price of a house is $210,000. Using the CPI factor fromUncle Sam, the median price of a house should only be $98,300! But, the realrate of inflation has brought that cost up way more than what the governmentsays. In fact, housing prices have jumped more than 100% higher than the CPIwould have you believe!The same thing is true of gasoline. Remember when gasoline was only 59cents a gallon? We now pay $2.99 a gallon today to fill up our car. 23
  38. 38. We could go on making examples all day long, but we think you get the point.The point is, what the government tells us about inflation and what really is happening are two different things.In fact, they are so different, that in our viewpoint, the CPI is a meaninglesspiece of information. We dont pay any attention to it at all.We cant go into the department store and tell them they have to charge us lessfor our clothes because, according to the government, the price should only beabout half of what theyre charging!The other thing thats very important to understand is that different types ofitems have different amounts of inflation attached to them. Some go up muchfaster than others.Medical care and college costs, for example, are significantly more inflatedevery year than other costs.Even a general category, like food, may have certain items that explode in priceover a period of time because of shortages, increased production costs, etc.(remember when sugar tripled in price literally overnight?)All this can be summarized by saying there is more inflation than we realize. Ifwe dont plan for it and allow our retirement plan to have a built-in inflationfactor; if we dont plan our investments to include a generous amount ofinflation to our costs, our retirement plan isnt going to work.Lets carry some of these figures forward to find out what this really means toyou.For example, as of this writing, we mentioned a few moments ago that gas is$2.99 a gallon. In 1971, if you had told someone that gas would run $2.99 agallon, they would have thought it would be too expensive to drive a car.If you had told someone in 1968 that his or her $20,100 house would be sellingfor $218,900 today, they would have thought you were crazy! (In some places,that $20,100 house has sold for more than $300,000!)When you had a baby 30 years ago and spent about $720 on doctors andhospital fees, you would have thought someone was a lunatic if they told you it 24
  39. 39. would cost $7,000-$8,000 to have the same baby today! And if there are anyserious complications, the costs can easily exceed $1 million dollars today.The national average for medical inflation is over 14% per year.See, Grandma Hannah didnt realize how bad things were, because she wasliving her life day-by-day and didnt see the jumps in prices all at once. It justsneaked up on her! Will inflation sneak up on you?That $2.99 gallon of gas we bought today, based on a realistic inflation figureof at least 5% per year, will cost us $4.87 in ten years, and $7.93 in twentyyears. Imagine it costing over $100 to fill up your car!The monthly premium on your health insurance that might cost you $1,000 amonth could be $3,700 per month in ten years if it rises with the current rate ofmedical inflation of 14%.The car that you bought for $20,000 with a monthly payment of $310 mightcost $30,000 with a monthly payment of $450, ten years from now, and morethan double that in twenty years. Can you imagine paying $850 per month for acar payment, just to get an average, nothing-fancy type of car?Well, its no easier for you to accept paying that high of a monthly car paymentthan it was for Grandma Hannah to accept that her $97 month rent would turninto a $700 month fee at the retirement center for her to have a place to live.It’s difficult to imagine a basic car costing $40,000, a dinner at McDonaldscosting $15 per person, or paying $10 for a box of cereal.But you had better stop thinking those things aren’t possible because somedaythey will become a reality. Slowly and surely your budget will increase. It canbe frightening if you dwell upon it. Nevertheless, just because its scary doesntmean you cant take action and do something about it.So, what do we do? How do we deal with inflation?Now that we understand its there and we understand how devastating its goingto be, were going back to our old friend planning as the solution.So how do we start planning for inflation? 25
  40. 40. The first thing we have to do is figure out what our monthly budget is in todaysdollars, and come up with a realistic number of how much after-tax income weneed to live on, right now.You have to pick one or more inflation rates, and see how much this samemonthly budget will cost 5, 10, 15, 20, 25 years from now...to have the sameexact lifestyle based on the inflation rates that you pick.Then, you have to take a look at your investment portfolio plus your currentsources of income such as your salary, pension, Social Security, and so on, thatyoure receiving now. You have to figure out what youre actually getting ininterest and the return on your investments. This will tell you what your cashflow is today.Then, well let the computer figure out how much you need to save and/or whatyou need to earn on average on your investments and/or how much you have tocut your life-style in order to make the whole thing work.The charts and graphs at the end of this chapter depict what were talking about.They show a couple whom we named "Retired," retiring right now, with thefollowing situation:• They need $2,300/month to live in todays dollars.• They wanted to plan for a 5% annual rate of inflation from here on. In other words, their living costs are projected to increase 5% per year.• Their combined monthly income from pension and Social Security is $2,175 per month.• Their current investment assets (which includes their savings, IRAs, 401K, stocks, bonds, etc., but does not include the value of their house, since they wont be selling it) are $169, 897.When they came in for planning, this couple was only short by $125 a monthfrom their fixed income and what they needed to live on each month.They assumed they could make up the difference from the interest anddividends on their $169,897 "nest egg" and they would be fine. After reviewingtheir investments, it was determined they were earning about a 4% after-taxrate of return on their money. (A lot of it was in CDs, which dont provide a 26
  41. 41. great after-tax rate of return since theyre fully taxable.) Anyway, heres whatthe graph and chart tell us:• If they kept doing what they were doing when they came in for planning, they would run out of money and be dead broke at age 86! And thats assuming no one got sick and had to go into a nursing home for any period of time!• They would have to earn 9% after-tax on their money to keep up with inflation. The second to the last column on the right shows the results of only earning 4% per year.• If however, they increase the rate of return on their investment portfolio to 9%, their investment base and assets would last until age 94, which would basically assure them they would not run out of money during their expected lifetimes!Now, if they arent willing to change their investments, the only choice theyhave is to cut back on their life-style, a lot! We calculated they would have tocut $500 plus a month (in todays dollars) out of their budget, to $1,800 amonth, to make their retirement work at a 4% average rate of return! (Whichthey did not want to do at all since the $2,300 a month was quite a bit less thantheir pre-retirement income.)Lets walk through the charts at the end of this chapter and you’ll see how thisprogram works. Everything were describing here is indicated with acorresponding number in parentheses on the charts.1. In the first column of Projection #1, we see the $2,300 a month, or$27,600/yr, they need to live on in todays dollars.2. Youll see at age 76, for example, this figure has risen to $46,205 per year,which is the current $2,300 a month, inflated at 5% per year. At age 86, the$2,300 a month income need has grown to $6,714, or more than $80,000/yr!3. Their combined Social Security income is $1,009, and their combinedpensions are $1,166 a month currently (See column 5), with only SocialSecurity growing each year due to the cost of living raises retirees get fromSocial Security. (Most peoples pensions are fixed and do not grow.)4. They are currently short $125 a month (See column 4), and at a 4% return ontheir investments, they will be dipping into principal each year. At age 83, they 27
  42. 42. will be in the hole $29,145 a year, and their nest egg will have dwindled downto $121,403 and within three years, ALL THEIR MONEY WILL BE GONE!(See column 8)5. In Projection #2, if they earn 9% on their IRA money and 6% on their otherassets, they never run out of money!6. Projection #3 is the same as Projection #1 except we reduced their life-styleto $1,800 per month, a cutback of $500 a month in todays dollars, in order forthem not to run out of money.(Assuming there is no illness of a serious nature of any kind).Cutting back on life-style is not what most people want to do. You, likeeveryone else, do not want to reduce your standard of living when you retire.In fact, most people want to increase their life-style because they have moretime to do things and spend money.The pages following the charts show their situation graphically. You can seehow different their retirement picture would be if they improved the returns ontheir investments. This move would allow them to maintain their lifestylewithout cutting back.These pictures tell it all. 28
  43. 43. 29
  44. 44. 30
  45. 45. 31
  46. 46. Retirement Projection #1Retirement Projection #2 32
  47. 47. Retirement Project #3 33
  48. 48. If they keep on doing what theyve been doing, they will end up just likeGrandma Hannah!No doubt about it.Even if we lower the inflation projections a bit, the results will still be similar.This couples picture is not too much different from most people we see.Whether they are in this income and net worth bracket, much lower or evenmuch higher! (Higher income people usually need more income per month andtherefore have just as dangerous a situation as the retired couple in ourexample.) Remember that inflation doesnt care whether you have lots of money or little money. It wipes out your purchasing power at any income level. It is definitely a non-discriminating villain!So, whats been accomplished by doing a plan like this?We have analyzed what you need to live on in todays dollars, which in and ofitself is a good thing to know and a very helpful tool in your planning. Even ifyou dont do anything about this problem, at least youll know what yourespending each month.Secondly, you have a realistic plan based on a realistic expectation of inflationand not the unrealistic CPI figures the government would have us use.Finally, we see what happens to you if you dont change the way you invest orspend money, and how you may need to alter some of your investments inorder to give you a potentially better, higher rate of return.A better yield will give you have a better chance of making your retirementplan work and deal with the inevitable inflation you will face!No one wants to end up like Grandma Hannah. No one wants to end up deadbroke and having to depend on your family or other charity to take care of you.There are lots of Grandma Hannahs out there, and lots more Grandma Hannahsare doomed to happen!We dont want this to be you. Just because you might be okay today doesntmean youll be okay somewhere down the road. 34
  49. 49. People live a lot longer now and this makes the effects of inflation even worse.All the improvements in health care combined with the increasing healthconsciousness of the American public have created a bigger problem inretirement! The longer you live, the more you will need your money to grow soyou can beat inflation!There are many things in this book we believe are critical to understand andknow what to do about. Inflation is certainly one of them. Dont be naive andstick your head in the sand and just hope things will turn out okay.These days that type of "planning" wont work. No one has a crystal ball toknow exactly what the inflation rate will average over the coming years. Butthat doesnt mean we cant use the past to help us make some educated guessesin planning for the future.We think that the chances are good that the average rate of inflation will behigher than what we have experienced in the past due to the increasing nationaldebt.So, if inflation in fact gets higher than its been in the past, the chances ofhaving the Grandma Hannah problem are even greater. Even if inflation stayswhere it is now or drops a little, we still have to prepare.As we have said in the previous chapters of this book, in our opinion, the onlyreal answer is to plan. Plan and then plan some more.Monitor your plan, update your plan and make adjustments as necessary soyoure always on target and you dont ever end up like Grandma Hannah.Inflation is the most overlooked monster lurking out there to bite your financialhead off. Dont pretend by ignoring it and hoping it will go away. It wont, nomatter what our government and economists tell us.So YOU have to take the right actions if you want to be secure and not end uplike so many Grandma Hannahs!Think about it:• Inflation means "things you have to buy go up in price over a period of time." 35
  50. 50. • The Consumer Price Index is an inappropriate government formula for financial planning purposes.• Grandma Hannah committed the sin of enjoying good health and believing she would be okay in retirement, when, in fact, inflation had wiped her out.• At the current rate of inflation, a nursing home stay will cost $8,500 - $19,000 a month in ten years. The government will not pay for this. Nursing home costs are rising at twice the “official” inflation rate.• Inflation can wipe out your purchasing power at any income level. It does not discriminate! 36
  51. 51. Chapter 5 WHAT THE IRS DOESNT WANT YOU TO KNOW!The IRS. Three letters that bring concern into the minds of all. The taxcollector. A modern day version of the Sheriff of Nottingham Forest.Paying taxes is an act that people have hated since the beginning of mankind.All through history, you can find story- after-story and tale-after-tale of peoplefighting the tax collectors.In fact, theres a country you might be aware of that was founded with theslogan "No more taxation without representation." (Sound familiar?)Well, these days, most of us do have taxation without representation. There isvery little you can say or do, that will affect what tax laws are in place, or howthe tax laws are created.What you CAN do is understand how tax laws work, understand how taxplanning works, and be aware of the options that you have and can use tolegitimately, legally and safely reduce your taxes.We mentioned in Chapter 3 that even saving as little as $200 a month over aperiod of years can be worth tens of thousands of dollars of extra money inyour pocket.We also want to re-emphasize that you have absolutely nothing to fear from thetaxman if you follow the laws. Many people tell us they dont want to do anytax planning or take advantage of any tax strategies because they are worriedabout "getting audited."Well, you may get audited at some point - who can tell? When you have donenothing illegal, followed the tax laws exactly as written, used the IRS own taxrules, there isnt too much that can happen besides using up your time with anaudit. Remember, they cant do anything when you follow the law. 37
  52. 52. In a famous court case decades ago, Justice Learned Hand, when issuing hisopinion in favor of the taxpayer, said that taxpayers not only have the right, butthe duty, to use every legal strategy available to them to reduce their taxes. Taxpayers are not required to pay any more tax than the lowest amount the law demands. This theory, and way of thinking, must become a way of life.As you plan for retirement, you must plan out your taxes and reduce them asmuch as possible. No matter what stage you are in life, no matter what you aredoing, we cant imagine why anyone would want to pay more taxes thenrequired by law! Since we see so many people overpaying their taxes, it mustcome from not understanding the tax laws. Not understanding how tax planningworks, or mere procrastination and lethargy. Were going to put an end to thatnow!Were going to show you how you can save taxes, give you some concrete ideason how to reduce the taxes you pay, and be in a position to put more money inyour pocket every month instead of Uncle Sams.Lets start off with a brief discussion of what tax planning really is.Tax planning involves three things:1) discovering the different strategies you can use to make wise choices and educated decisions concerning the tax strategies you want to implement;2) understanding them fully; and finally,3) integrating your tax situation with your entire financial plan.As weve mentioned about financial planning in general, everything you do inone area of your financial life will affect all the others. Nowhere is this truerthan in the tax area. There is nothing you can do, financially speaking, that doesnot have an effect on your taxes.• If you keep your money in the bank, that affects your taxes.• If you take your money out of the bank and put it somewhere else, that affects your taxes.• If you sell stocks, that affects your taxes.• If you buy a house, that affects your taxes.• If you sell a house, that affects your taxes. 38
  53. 53. • If you set up certain trusts and wills for your estate, that affects your taxes.• If you make gifts, that affects your taxes.• If you have a part-time or full-time job, that affects your taxes.• If you own any kind of business, that affects your taxes.Every activity, financially-speaking, will be reflected somewhere on those taxforms.Since tax planning and investment planning are so intertwined, they must bedone together, in concert, so every decision you make will be integrated andcoordinated with the other areas of your financial life.The first tax strategy were going to talk about is tax deferral. 1. Tax DeferralTax deferral is the concept of having earnings on your investments not besubject to current taxation, but only be taxed when you take money out of theinvestment at some point in the future.Lets take a look at an example of how powerful tax deferral can really be.Ed and Bob both had $250,000 to invest. Ed decided to put his money in a 5%CD at the local bank. Bob decided to put his money in a guaranteed fixedannuity that will also pay 5%. Furthermore, lets assume that both Ed and Bobare in the 28% tax bracket.Ed made $12,500 (5% of $250,000) each year, but has to pay $3,500 (28% of$12,500) in taxes each year on his earnings. Ed will never see that money againand will never be able to use it for his benefit. Eds asset is really only growingby 3.60% (5% minus 28% in taxes) each year. If Ed kept his CD, paid tax eachyear as he has been, Ed would end up with $507,148 at the end of twenty yearsafter paying all taxes. Not a bad sum.Because Bob invested his assets in a tax deferred annuity, Bob doesn’t have topay any current income taxes on his earnings. Therefore, his assets really dogrow by 5% tax deferred. If Bob holds the asset for the same twenty years, hisbalance will be $663,324. However, Bob never paid any taxes on the growth of$413,324. If he were to cash in the annuity, he would have to pay all of thetaxes on the growth. In keeping the comparison fair… let’s assume he couldcash it all in at a 28% tax bracket, (for example purposes) he would pay a tax of 39
  54. 54. $115,730. This would leave him with $547,594 after-tax (But keep in mind, inthe unlikely event Bob did cash out all at once, he would be put into a highertax bracket). The bottom line is because Bob controlled his taxes, he was able to make an extra $40,446, after-tax!By controlling taxes you can make substantially more money. This is the wholereason that IRAs and pension plans are so popular. You dont have to pay anytaxes until you withdraw the money, which hopefully will be at a lower tax ratein the future. The larger the growth rate and the larger your tax rate, the moreimportant deferral is.There are many ways of deferring the tax on your assets. Annuities, lifeinsurance, IRAs, 401(k)s and 403(b)s all provide tax deferral. These are justsome of the legal programs that allow the owners not to pay taxes on theearnings until they withdraw them from the plan.2. Charitable Remainder Trusts (CRT)How would you like to be able to sell an asset thats gone up in value, pay $0income tax (capital gains tax) no matter how large the profit, and be able tokeep earning income from investment of the proceeds of the sale for the rest ofyour, and your familys lives?You can also take charitable deductions and be able to have a big chunk ofmoney go to charities at your death without your family losing any money.Sound interesting? What weve just described is a Charitable Remainder Trust(CRT).We will tell you a story about Julia and Bill. They were a couple in their early70s in great health with lots of kids and grandkids. Years ago, they boughtsome land way out in the country for $10,000 thinking they might build on itsome day. The years passed and they never paid much attention to the landand, for various reasons, never did anything with it.As progress moved outside the main part of town, they soon discovered theirlittle piece of $10,000 land was in the path of development, or a gold mine, youmight say. As the development came closer and closer to their land, the price ofthe land started rising in value. Julia and Bill really didnt want to sell the landbecause 1) they didnt want to pay the taxes on the profit and 2) they didntknow what they would do with the money anyway. The land just sat there. 40
  55. 55. When they came in for retirement planning, it was pointed out that this land(which they estimated was now worth about $1 million) wasnt doing them anygood. They werent receiving any income. Their property taxes were goingthrough the roof. They were advised to have liability insurance because of therisk of teenagers partying there. We told them that they should consider sellingit.Bill and Julia protested and said income taxes would kill them. They had talkedwith their accountant who said the profit would be close to $1 million and theycould expect to pay about $200,000 in capital gains taxes from the sale of theland. The money left over would be a nice chunk of cash, but the thought ofpouring $200,000 down the drain really bothered them.We asked them if they had heard of a Charitable Remainder Trust. (CRT) Afterwe explained it to them, they were very excited and set one up. Heres whathappened.Julia and Bill set up a Charitable Remainder Trust naming their church and thechurch school as beneficiaries. They were named co-trustees of the Trust, andthe property was re-titled and donated to the CRT and owned by the CRT.The act of donating this property irrevocably (meaning it could never bechanged) generated a huge charitable deduction. (The complications involvedin the calculation will be omitted for purposes of simplicity.)The donation of $1 million worth of land generated over a $300,000 taxdeduction which, spread out over the next few years, could save them as muchas $100,000 in income taxes.Thats not the best part. The best part is when the Trust took title to theproperty, Julia and Bill, as Trustees for the Trust, sold the property to adeveloper and received $1 million.The $1 million went into the Trust and was now sitting as a cash investment ofthe Trust. The capital gains tax paid upon the sale of an asset with a million dollar profit was exactly $0! Yes, thats right. Zero capital gains tax.Since the Trust owned the property, and the Trust was a Charitable Trust, it wasa tax-exempt entity, and therefore, any sale of assets inside the Trust wascompletely free of capital gains tax. 41

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