Ideal Account Characteristics

When you are thinking on and planning out your finances, it is really important to understand characteristics you favor before you fund financial vehicles. Many people take into account risk, rate of return, or time period.

When I look places to park money, these are the top account characteristics I look for, and can help you find:

Ideal Account Characteristics


Tax deferred growth means you aren’t paying tax while the money is just sitting there.

Tax free distributions means you don’t have to pay tax when you are withdrawing the money.

A competitive return is important to outpace inflation.

High contribution limits are an absolute must. Sometimes it isn’t enough to max fund a 401(k) that has a cap on it.

Deductible contributions could be advantageous.

Collateral opportunities are very important. This puts you in a position where you don’t need to withdraw money and interrupt compounding interest, but can still leverage your money.

A safe harbor with no loss provisions and guarantees are very important for people with low to moderate risk tolerances.

A guarantee loan option can be very important when capital is needed quickly. Think about trying to take a loan against the equity in your home and the long process that requires certain qualification. Having immediate guaranteed access can be a life saver.

In case the loan option is utilized, an unstructured loan eases cash flow pressure. Payments when you can make payments, paying any amount you like, not having the loan reported to crediting agencies. This is especially valuable to small business owners.

Liquidity, use, and control of the money. This is another absolute must. The ability to access, use, and maintain control of the money at any given time.

Any additional benefits you look for when you are comparing financial vehicles?

Who Even Needs an Annuity Anyway?

In ultra-conservative safe money you basically have four options:
1. A CD
2. The Cookie Jar
3. Cash
4. A Fixed/Indexed Annuity
Annuities are similar to CDs. They are for specified periods of time, there is a surrender or penalty charge if withdrawn early, and the higher rate you get, the higher the penalties will be if withdrawn early.
A CD is backed by the bank and the FDIC where an annuity is backed by the assets of the insurance company and the Life and Health Guarantee Association set up to help protect consumers.
When money is placed in a fixed/indexed annuity, the policyholder can elect to allocate money into a “fixed” bucket that pays a stated interest rate, usually with a guaranteed minimum. The policyholder can also elect to allocate money into various “indexed” buckets that vary by contract. These indexed buckets accrue interest based on the market index they follow with a stated cap. Let’s say your annuity is allocated to the S&P 500 index for a year period and your annuity’s cap is 8%. If the S&P 500 goes up 10% that year, your annuity will be credited 8%. Here comes the power of annuities: if the S&P 500 LOSES 10%, your annuity will avoid the losses. What does that look like? What if we went to a casino and I told you: “I will cover all of your losses, but you have to split your winnings with me”. Would you take my offer? That is basically what the insurance company is doing. They are pooling thousands of policyholder’s capital and offering to share earnings with you and cover all the downturns.
If you think the bank is in a stronger position than the insurance company, consider this: The only building as tall as the bank’s in a major city, is the insurance company’s building. between 2008 and 2012 only eight insurance companies went insolvent with a combined liability of $900 million. A fraction of the $639 billion in Lehman Brothers bankruptcy. And those policyholders with the insolvent insurance carriers received all their contractual benefits.
There are several important considerations when contemplating purchasing an annuity. The insurance company needs to make a buck. They are going to pay you a bonus as a policyholder, pay the adviser, they don’t charge a management fee, so therefor they need to hold on to at least a piece of the money for a period of time in their portfolios to turn a profit. Therefore surrender charges are in place to discourage too much withdrawing in early years.

There is a time commitment. Surrender charges are necessary because they allow the company to invest in the long term financial vehicles necessary to create this attractive indexed interest crediting method. Surrender charges can be avoided by the customer, because every fixed annuity allows for some portion of the annuity’s value to be withdrawn even during the surrender charge period without incurring the surrender charge.

So an annuity is a great vehicle for conservative safe money that doesn’t need to be touched in whole over a certain period of time. They are also great for individuals who feel it is more valuable to avoid financial losses than pick the winning investments. They can also be built as an IRA that is tax deferred!

The Effects of Inflation

In the world of retirement planning, inflation can be a deal breaker. Inflation is easily the number one most overlooked factor I see when talking about retirement planning with potential clients. In this calculation, I am going to show you the effect inflation can have an your retirement income!

For our example let’s use a 45 year old. We will assume this person graduated high school and entered the work force in 1987 for the purpose of calculating inflation.

Inflation 87 to 13





Now that we have established our average inflation rate, we will use this number to run our calculation. Now let’s assume our 45 year old is retiring at age 65, has a current income of $120,000 growing at 2.5% a year, currently has $80,000 saved, and is earning an after-tax rate of return on their money of 4.5%.

Inflation Calculation













This calculation is telling us in 20 years when our 45 year old retires, they are going to need to withdraw their current earned income of $120,000 plus an additional $89,977 from their nest egg to maintain the same lifestyle in retirement that they are while working! This 45 year old would need to be saving 94.08% of their annual income JUST to carry their current lifestyle into retirement! That obviously conflicts greatly and creates a war between current lifestyle and future lifestyle. When I put together creative financial strategies for clients I take inflation into account and create solutions that can hedge against inflation and other challenges that effect retirement income.

Have you answered the four toughest financial questions that relate to retirement? If not, when do you want to know:

  1. What rate of return do you have to earn on your savings and investment dollars to be able to retire at your current standard of living and have your money last through your life expectancy?
  2. How much do you need to save on a monthly or annual basis to be able to retire at your current standard of living and your money last till life expectancy?
  3. Doing what you are currently doing, how long will you have to work to be able to retire and live your current lifestyle till life expectancy?
  4. If you don’t do anything different than you are doing today, how much will you have to reduce your standard of living at retirement for your money to last to your life expectancy?

Case Study – The Johnson Family

What is one way a Life Insurance policy can provide flexibility to meet any challenge? Let’s take a look at this sample case study and see!

The Clients:

John Johnson, age 55 and Jill Johnson, age 54

Current Financial Need:

Reallocate assets to help provide sufficient retirement income and available funds for future and health care costs, while providing death benefit protection.

Long Term Financial Need:

Develop an estate plan that can reduce estate taxes.

The Solution:

John implements a Whole Life insurance policy on himself, and funds it by taking a 72t distribution from his IRA and making up the difference out of pocket.

By the time John retires, the death benefit will have grown substantially and the cash value of the whole life policy can be used to help provide sufficient income during retirement. In addition, the guaranteed death benefit of the whole life policy can pass income tax-free to the beneficiaries for estate planning purposes.

This shows the power and flexibility of a properly designed Whole Life policy which not only offers a death benefit, but offers living benefits such as retirement income, tax advantaged growth, a safe harbor for savings, and more.

A Historical Lesson on Taxes

There is nothing certain in life except death and taxes. Did you know in 1913 the government decided to create a tax to pay for World War I? It was introduced as a temporary thing! Think your in a high tax bracket?

Did you know the highest tax rate in history was in 1944 and 1945 when America was paying for World War II? The highest tax bracket at that time was a whopping 94% for income over $200,000!

In addition to that, the average top tax bracket since inception is 58.61% as of 2013!

In the graph below, if you follow the timeline and look at what preceded spikes in taxes you would see several wars, the stock market crash preceding The Great Depression, and changes in presidencies. Now look to the recent years. Taxes have remained relatively level for the last 20 years, but we have been at war for many years with high spending. What do you feel is in store for tax payers in the next several years?

Historical Tax Rates

5 Biggest Mortgage Myths

Let’s play a game of true or false:

  1. A large down payment will save you more money over time than a small down payment.
  2. A 15 year mortgage will save you more money over time than a 30 year mortgage.
  3. Making extra principal payments saves you money.
  4. The interest rate is the main factor in determining the cost of a mortgage.
  5. You are more secure having your house paid off than financed 100%.

Every single answer is false. Let’s talk about these common myths one at a time.

  1. If you make a larger down payment your monthly payment WILL be less. But you didn’t necessarily save more money. You have to calculate the opportunity cost on giving up that down payment. If you had kept the down payment invested in your portfolio, it could have been worth much more at the end of the mortgage period than the difference in monthly payments.
  2. Many people argue they can pay off their home in 15 years and save on interest. Take a look at the example below showing the difference in monthly payments between a 15 year mortgage and a 30 year mortgage invested at the same interest rate.15Y vs. 30Y Mortgage
  3. If you make extra principal payments you will save on interest, and you will also lose the ability to EARN interest on those dollars you are sending to the bank.
  4. By talking about these common myths, we have discovered there are many factors when determining the cost of a mortgage. Especially opportunity cost.
  5. This myth is tricky because it doesn’t talk about cash flow. If you make a large down payment, take a 15 year mortgage, and make accelerated principal payments you are going to really restrict cash which will effect your savings ability during those 15 years. If you make a minimal down payment, take a 30 year mortgage, and invest any extra money each month, you are going to be in a much stronger financial position. In 15 years you could pay off the house with all the savings you have accumulated over the 15 years, or you can keep your money earning interest and continuing paying off the house at the same time. This second scenario puts the options and control in YOUR hands though.

Complimentary Buy-Sell Agreement Review

We at IFC have seen a sharp increase in the use of buy-sell agreements amongst our small business clients. We have also conducted reviews of buy-sell agreements in effect and found there are many drafted with contradictions or missing information. We want to offer you a free review of your buy-sell agreement to make sure the contract is as effective and accurate as possible. Contact us if you would like to schedule your review!