Legal DisclaimerEric Krock does not have any financial expertise, certifications, orqualifications. He does not guarantee the accuracy, currency, orcompleteness of this presentation or make any warranty, expressor implied, or assume any legal liability or responsibility for theaccuracy, completeness, or usefulness of any information or itssuitability for any purpose whatsoever. This presentation isprovided as-is for informational purposes only, is general in nature,is not intended to be a substitute for qualified financial, tax, or legaladvice. Use is at your own risk. In no event shall Eric Krock beliable for any direct, indirect, special, punitive, incidental orconsequential damage or any other damages whatsoever arisingout of or in connection with the use or misuse of this presentation.For investment and retirement advice thats right for you, see acertified financial planner! For tax advice that’s right for you, see anaccountant! For legal advice that’s right for you, see an attorney!
Disclaimers• I’m not a certified anything.• All investments have risks.• Past performance does not guarantee future results.• No investment strategy is optimal in all situations.• I am not responsible for your choices or their consequences. You are.
Disclaimers• I’m not an accountant and can’t give you tax advice. Get an accountant for tax advice that’s right for you.• I’m not a financial or retirement advisor.• This is for informational purposes only.
What are your financial goals?• Tithe?• Pay down existing debt?• Have children & put through college?• Build up liquid assets? (cash, stocks)• Cushion against job loss?• Cushion against disability/early death?• Buy a home?• Save for retirement?
The Problem: Uncertainty• You could develop a short- or long-term health problem (stroke, cancer …) that interrupts or reduces earning power
Real Problem: We Can’t Predict theFuture• Can’t predict your personal future (heart attack? stroke? cancer? Alzheimer’s?)• Can’t predict the global future (debt crisis? inflation? low growth? bird flu epidemic?)• But you can try to prepare so you’re better able to handle various possible scenarios• Learn to invest and manage risk
Things We CAN Guarantee• Social Security and Medicare are running out of money. Current tax rates can’t pay for projected benefits.• Therefore they HAVE TO change.• Taxes will go up and/or retirement age will increase and/or benefits will be cut.• So don’t rely on them for your own future.
Things We CAN Guarantee• Social Security alone provides for a low standard of living in retirement and no cushion for emergencies.• Lesson: Don’t rely on Social Security alone for your retirement.
Likely Things• Health care costs will continue to rise as new, more-expensive treatments are invented.• Medicare benefits for the elderly will be reduced (e.g. later eligibility age, higher copays and premiums, etc.)• Lesson: Don’t rely on Medicare alone to pay for retirement health expenses.
Tax Rules of Thumb• Never risk the wrath of the IRS.• Legally deferring taxes is good. (IRA, 401(k), ETF instead of mutual fund)• Legally deferring taxes until after your death (when they may pass on tax-free to heirs in your estate) is better.• Legally avoiding taxes completely is best. (permanent life insurance & Roth IRA/401(k) compounding gains)
Insurance• Health• Auto (required if you drive)• Homeowner/Renter (fire, theft) – Separate: Flood insurance (if in zone) – Separate: Earthquake insurance• Umbrella policy (wise to have)• Life• Disability• Long-Term Care
Health Insurance• Fact: anyone can be diagnosed at any time with breast, brain, or prostate cancer, or have a car accident or stroke• Make sure you’re covered• Health problems are a common cause of bankruptcy• Fancy car + no health insurance = stupid
Umbrella Insurance Policy• Goes “on top of” basic automobile and homeowner’s insurance policies• Covers you up to a high amount (e.g. $2M)• Doesn’t cost much• Protects your assets if you are at fault in a bad auto accident (for example)
Why Life Insurance?• Anyone can be killed in a car accident or have a fatal heart attack or stroke without warning at any time.• If that happens, who will take care of your spouse and children?• If you don’t have spouse & children today, you may someday!
Life Insurance Basics• Life insurance pays out tax-free to the beneficiaries.• Life insurance pays out immediately and avoids probate of estate, so heirs don’t have to wait 12+ months to get money.• Age and many health conditions will make it expensive or unavailable, so sign up now while you’re young & healthy!
Factors That Can Increase Cost ofLife Insurance Policy• Age (older more expensive)• Personal health history (e.g. past cancer)• Current health status: overweight, diabetes• Family health history (e.g. cancer)
Term Life Insurance (Simplified)• Fixed payment each year• Pays fixed amount if you die• No value when policy expires• Benefits: cheapest form of life insurance• Use: cover your family while children are minors or in college• Drawback: not an investment; no value when policy ends
Permanent Life Insurance, a.k.a.“Whole Life” (Simplified)• Fixed (much higher) payment each year• Insurer buys term policy to cover their risk & invests the rest for you in “relatively safe” investments• Pays fixed amount if you die• Cash value compounds over time, ultimately exceeds face value
Permanent Life Insurance Benefits• Policy never expires if pay premiums.• When you die, it pays out, so it provides insurance against death.• It’s an investment whose dividends compound tax-free, so it reduces taxes. (like a second 401(k))• It’s invested in bonds, etc., so it diversifies your investments.• Can borrow cash value, so it’s savings.
Permanent Life Insurance Drawback• Much more expensive than term.
Two Life Insurance Strategies1. Get low-cost term policy and invest the rest of your money in the stock market for its higher returns.2. Get higher-cost permanent policy as tax-sheltered investment and for diversification out of equities.
“Term to Perm” Option Life Insurance• Northwestern Mutual offers permanent life insurance that starts off as term (so cheaper) but that you can convert to permanent each year a little at a time on a schedule of your choosing.• Lets you lock in life insurance coverage now (in case you get sick) but keep costs low now.• Lets you convert to permanent over time.
How Much Life Insurance Do YouNeed?• Best case answer: as much as they’ll let you buy! (multiple of your income)• Realistic answer: as much as you can afford• Eric’s guess: 13x annual income?• Example: $100k annual income, $1.3M coverage, invest & withdraw 4% annually $52k annual income
Eric’s Rules on Health, Life, andDisability Insurance• Buy them before you need them, because you can’t buy them after you need them!• Buy them now before you get even older and sicker than you are already and they get more expensive!!!• Buy them now in case income drops since income limits size of policy.
Insure Both Spouses!!!• A so-called “non-working” spouse provides enormous financial benefit to family: child care, shopping, meal preparation, transportation, etc.• Replacing those benefits if non-working spouse dies is expensive! (e.g. child care alone)
Disability Income Insurance• You’re about 3x more likely to become disabled than to die early.• Only eligible for Social Security after 40 quarters of pay-in.• 75% of Social Security disability claims rejected.• Even if accepted, it’s not a lot.• Action Item: verify your eligibility for Social Security disability & retirement
Factors That Can Increase Cost ofDisability Insurance Policy• Everything on life insurance list, plus others, e.g. history of back pain
Supplemental Life & DisabilityInsurance Through Your Employer• Check if you’re eligible for extra life and/ or disability insurance (e.g. Aflac)• Often a great deal: group policy very good rates• Coverage usually limited, e.g. life insurance up to 2x salary, so not enough alone• You lose it if you change jobs
Long-Term Care Insurance• Covers in-home and/or in-patient nursing home care• e.g. $200/day benefit after you’ve paid for 180 days of paid care services yourself• Expensive• Insurers have underestimated claims• Rates going up (by 40% in some cases)• I have it, but not a slam dunk
Annuities (Simplified)• You pay an up-front fee and they guarantee a certain payout per year (hopefully indexed for inflation!) until you (and perhaps your spouse) die• Combining life insurance with an annuity can be used to hedge risk. If you die early, life insurance pays out and covers family. If you live longer than expected, annuity pays extra years of money.
A Diversified Portfolio• Own home as real estate investment & for tax benefits• Traditional & Roth IRA• ETFs for tax-exposed investing• Stocks diversified by geography, asset class• Money in the bank for short-term needs• Permanent life insurance to cover risk of death, diversify into bonds, tax benefit• Disability and (maybe) long-term care insurance for risk coverage
Don’t Be Overwhelmed• You can’t transform your financial situation overnight• You can’t completely guard against all risks• But you can make your situation a little better each month and year• Ten years later, you’ll be much better off• Start changing things for the better now!
Action Items• Check your 401(k) & IRA investments• Pay down credit card debt• Optimize your investment allocation• Get life insurance (term to perm?)• Consider disability & long-term care insurance
For Further Reading• The Black Swan by Nicholas Nassim Taleb• 100 Questions Every First-Time Home Buyer Should Ask• Boundaries by Cloud & Townsend• Subscribe to Wall Street Journal, Fortune, and Forbes
For more information:http://www.vanguard.com/http://www.nmfn.com/Company names used for identifyingpurposes only. Neither Vanguard norNorthwestern Mutual nor Aflac nor anyother company has seen or endorsed thispresentation.