Wednesday, February 18, 2009
Don’t Give Uncle Sam an Interest Free Loan
Do you get a tax refund each year?
How big is it? Is it over $1,000? Is it over $3,000?
I know several people who consistently year after year get a significant tax refund check every year. Most people either do this ignorantly or as a “forced savings plan”. Either way you are giving the government an interest free loan. It seems sort of backwards that if you owe the government money they charge you interest and penalties, but if they owe you they don’t pay you anything extra. Just recently we are seeing in California, and now in Kansas, that not only does the government not pay interest but for the time being, they are not going to even give you your money back at all! This is ludicrous. If they are refusing to give you back your money when they owe it to you they should then be paying you interest on that money at a minimum and should really be subject to penalties.
Well if you want to take accountability and responsibility and quit overpaying your taxes, you can simply adjust the exemptions on your W-4 with your employer. The calculations to do so can be found on the second page of the W-4. Or even better yet, you can utilize our 2009 W-4 Exemption Calculator to calculate it for you. Then simply download the blank W-4, fill it out and give submit it to your employer. Take accountability and responsibility for yourself. You can set up better forced savings plans that will actually pay you interest and that will allow you to access the money when you need or want it!
Tuesday, February 17, 2009
Missed Fortune - "How does a life insurance policy work"
For example if you wanted to pay $100k of premium you could elect to have let’s say $10k of death benefit. The cost on for that policy would be minimal. You might have $150 that year go to expenses, but if your excess premium ($100,000 - $150) earned 8 percent ($7,988). Who wouldn’t pay a measly $150 to have the rest be tax-free? And that is just the first year; it just continues to compound every year after that. Under TEFRA/DEFRA a formula was created so that you could no longer “choose” your death benefit based on the total premium paid, but rather it is calculated based on cost. So now the question is…can you still structure the policy to minimize the cost enough to still enjoy the liquidity, safety, and tax-favored returns? The answer is yes. When structured correctly the overall cost on the policy retroactive back to day one will be about 1 percent of your overall return.
Okay, here is the sample plan:
1. Paying a total of $100,000 into a policy. ( I am going to show this being paid as fast as possible, 5 years, although the longest you would want to take would be 11 years in order to minimize cost)
2. I am going to use a 45 year old male and a fixed indexed universal life policy. This means that the excess premium goes into the general portfolio of the insurance company, but rather than using that portfolio to determine the interest rate, we can use an index (like the S&P 500). Your money is not invested in the index, we are simply using it to determine your return.
3. I will link several of these examples to actual illustrations for your benefit.
· This first illustration is to show you the policy maximum funded/minimum death benefit. $100,000 paid the first five years and a death benefit of $493,794.
· You can lower the death benefit even further after a period of time shown here.
· This illustration is showing the internal rate of return (column 4) or your return after all costs have been taken out. This is represented as an average return up to the year illustrated. The policy is the most expensive in the first year, but as we maximum fund it, it performs excellent. Over 30 years it averages back to day one 6.84 percent. With a gross return of 8 percent, that would mean the cost was equivalent to 1.16 percent.
· This illustration shows a level income withdrawal beginning at age 67 and ending at age 100.
· This illustration is comparing the insurance policy to four other alternatives. (since we cannot make those type of deposits in a typical IRA/401(k), we are assuming instead that the deposit is as if it already existed as a balance)
I hope this helps. We are always happy to answer questions. If your question is case specific, your are always welcome to call Missed Fortune at 888-987-5665.
Wednesday, December 17, 2008
Risk and Liquidity
Whenever you look at risk, you should simultaneously be looking at liquidity. You can understand your risk exposure best by initially analyzing your liquidity. Do you have enough cash that is accessible to pay your mortgage, and pay all other bills? For how long? How about enough to allow you to ride out a downturn in the market, economy or job loss?
Be sure that you start with a sound foundation when building wealth. That starts with liquidity and managing risk. It is like the song I used to sing in Sunday School about the wise man versus the foolish man.
1. The wise man built his house upon the rock, The wise man built his house upon the rock, The wise man built his house upon the rock, And the rains came tumbling down.
2. The rains came down, and the floods came up, The rains came down, and the floods came up, The rains came down, and the floods came up, And the house on the rock stood still.
3. The foolish man built his house upon the sand, The foolish man built his house upon the sand, The foolish man built his house upon the sand, And the rains came tumbling down.
4. The rains came down, and the floods came up, The rains came down, and the floods came up, The rains came down, and the floods came up, And the house on the sand washed away.