RETIREMENT PLANNING FOR THE GREAT DEPRESSION AHEAD!

WEALTH PROTECTION

Those that have ears to hear; let them hear!  During the 90s financial planners dressed in blue suits, white shirts and ties, in large office buildings across the country, convinced people to switch from safe bank products to risky investments.  It is an historic sales success story!  Nearly 80% of the population was sold new financial strategies, based on diversification, to reduce the risk and offset inflation.  The process was so successful; the next generation has the assumption engrained in their mind.  Any suggestion to the contrary is immediately rejected.  Of course, the assumption that periodic stock market losses will be recovered within a few years is false!  Nearly every retirement plan is falsely based on annual gains!            

If you are a Baby Boomer, you have been taught retirement planning was the process of accumulating wealth for a later day.  Then, when retirement arrives, you simply live off of the continuous earnings.  One piece of knowledge often missing is a good understanding of the amount necessary for a comfortable retirement lifestyle.  Your parents believed retirement was living off the interest earned on bank accounts, back in the days when interest rates were around 7%.  My mother would switch banks for a fraction of a percent.  Boomers changed to investing in securities years ago with the introduction of 401(k) plans and now plan to live off of the annual stock price appreciation!  Same idea, but not the same safety!

Retired Boomers are constantly searching for high growth investments rather than value investments offering dividends.  Stock price gains and added contributions were used to calculate income in most retirement plans.  By the way, financial planners make most of their money from fees on money under management.  If you transfer investments to a money market account, their income stops!  So, there’s an incentive to keep you invested, even if it means you may lose money!  When was the last time your advisor suggested to go to cash?     

Everyone hopes for a sizable retirement account, enabling the retiree to spend the assumed annual gains.  If you think about it, it looks like their parents’ plan!  Except, their parents were never exposed to market risks!  The Boomers believe it will work better, but it requires continuous stock market gains!  But, if they lose a substantial amount of money, their comfortable retirement lifestyle evaporates.   

Economist Harry Dent’s research shows it is unreasonable to believe the boomers retirement plans will work as promised.  Our national economy cannot sustain continuous gains and historical data shows such assumptions were unrealistic.  The whole concept was misrepresented!  So, you have two choices: you can wait and see, or you can use MONEY STRATEGIES USING SOMETHING GUARANTEED SAFE®! 

The reality is “spending patterns” needed to generate continuous investment gains have changed.  Where Baby Boomers were spending massive amounts of money to raise their children, resulting in investment gains, the children have left!  The Baby Boomers are no longer spending as much, and the economy is driven by the consumption of goods and services.  The much smaller “X-Generation” is spending at the same rate, but there are fewer of them.  (By the way, economists have named generations for decades.  The nameless “Generation X” was never named because they were statistically insignificant.  Their numbers are too few to merit a name.)  So, how does this annual declining spending pattern mean to the Baby Boomer retirement planning?  There will be little, if any, investment gains!!!

When the newly retired suffers a massive investment loss, they are in the recovery of a lifetime.  They have lost the engine driving their retirement lifestyle.  Many retirees lost 34% in 2008.  To get back on the horse in 2009, they had to generate a 52% gain.  In the 2010 stock market crash, retirees withdrawing money to pay the bills may never recover!  So, stop using the accumulation approach to retirement planning.  Start using the wealth protection approach suggested in this report. 

WHERE WILL YOUR MONEY BE SAFE?

Every financial advisor has a bias.  Financial planners (defined as a salesperson offering stocks, mutual funds, variable annuities and bond mutual funds) will keep saying the market always recovers.  Harry Dent agrees, but the recovery will not start until 2023.  Keep your money safe for now and avoid the recovery step! 

When your financial planner says you need to stay invested as protection against inflation, ask for proof!  The inflation rate from 2000 to 2010 was 28.37%; when the stock market was actually down more than it was up.  Right now, the Dow is about the same as it was in early 2000.  So, there is little evidence of any correlation between inflation and the stock market performance.  There has never been a correlation.  The story was created in the 90s as a sales gimmick to sell mutual funds.  If it were true, your parents would have owned stocks!

Many retirees now own a combination of mutual funds and municipal bonds.  In the Harry Dent June 1, 2010, forecast newsletter (www.hsdent.com) regarding municipal bonds, he wrote: “We see very difficult times ahead.  There is obviously a tremendous amount of pressure on every level of municipal debt because of the lack of tax receipts being generated.  Many issuers are technically bankrupt, owning much more than they will ever take in.  We do not believe that these municipalities will have the political will to implement austerity plans.  Instead, we think that there will be a lot of upheaval as municipalities threatens to fail.”

Financial planners mislead Boomers when they say, “Historically, large cap stocks have averaged 9%.”  That sounds like you can plan to spend 9% of your portfolio during retirement.  The Boomer may visualize an ever increasing account!  If any historic or past performance gain is mentioned, ask the financial planner to explain “Alpha, Beta, and Normal Distribution.”  Much has been written over the last decade about alpha – the risk-adjusted return beyond a given benchmark.  By contract, beta, or the risk and return of the benchmark itself, is often overlooked.  What Baby Boomers are told is usually incorrect.  In good years, there was no issue with earning higher returns than one expects.  In bad years, this can have catastrophic affects, due to the nature of geometrically linked returns.  In other words, do not count on past performance.  It is meaningless!!!

Financial software often uses these faulty assumptions to generate retirement plans.  The software assumes that investment returns are normally distributed around a mean or average return (9% for Large Cap Stocks, per SBBI through 2007).  This assumption is made because it is true – usually!  But, returns are not independent and rely on underlying economic events and trends.  The software will demonstrate a normal distribution 68.26% of the time.  To reach a 99% confidence interval, the investor must be willing to accept a return that falls between -48% and positive 66% return.  So, how are you going to feel when you lose 60% of your money in the next depression ahead?  Better yet, how long will it take to recover the 60% loss?  Rich people will be less rich!  Less rich people may become poor!

Mr. Dent forecasts Treasury bonds and corporate bonds interest rates may increase in the months ahead.  Rather than give you the standard jargon – bond prices move inversely with interest rates – let me show you some numbers that help explain why rising rates poses a big problem to investors.  Let’s say a 30-year Treasury bond pays 4.50% today.  Later, the going rate is 6.50%.  Now, your bond is worth about 75 cents on the dollar.  Plus, bonds have liquidity problems, and bond mutual funds have even more problems. 

WEALTH PROTECTION IS PARAMOUNT!

Banks are considered safe by most retirees!  The current $250,000 government-backed guarantee was extended to 2012.  If you remember the historical savings and loan government take-over, you may recall there were some accounts frozen.  So, access to your money may be an issue.  Interest rates are very low and Dent forecasts even lower rates.  Living off of the interest will mean a lower lifestyle.

One financial product deemed safe is called the “fixed indexed annuity.”  Financial planners hate them because they are so competitive.  Billions of dollars have been transferred to fixed indexed annuity because they are guaranteed safe!  So, do not expect your financial planner to agree with me.  In some cases, their company will not permit them to sell fixed indexed annuities, and I am the enemy!        

The Boomers’ greatest obstacle to the wealth protection retirement planning is focusing on the rate of return!  Please don’t call me and ask, “What is the interest rate?”  If you lose 60% of your stock portfolio during the 2010-2012 stock market crash, what is your gain?  You should be asking about safety!  You’ll make more money putting the money under your mattress.  Statistics show most people did better owning CDs over securities from 1997 to present.  They never lost money!    

Harry Dent says the stock market will crash 60%, bank interest rates will drop to near zero, new bond rates will drop substantially in the future, and gold prices will tumble!  There will be no gains!  Seek safety and be positioned in 2023 to re-enter the stock market to reap massive gains in the next great stock market bubble boom! 

By the way, advisors selling fixed indexed annuities often mislead people with seemingly high interest rates.  I will discuss this aspect later, but for now, just understand the interest rate of a fixed indexed annuity comes in two forms: an annually-declared fixed interest rate or an indexed interest rate.  The indexed interest rate option is forecast to earn zero in eight of the next thirteen years.  So, do not fall for misleading interest rates on guaranteed lifetime income riders.

POPULAR FIXED INDEXED ANNUITIES WITH A GUARANTEE LIFETIME INCOME RIDER ARE NOT RECOMMENDED

Usually, when something sounds too good to be true, it’s too good to be true.  A few years ago, the mortgage industry was persuaded by the government to offer mortgages to people who could not afford them.  The premise was the mortgage would be backed by the rising value of the house.  Then, when real estate values plummeted, these mortgages became worthless.  By the first quarter of 2011, 25 million (48%) of the residential mortgages will be greater than the value of the house!  The “Credit Crisis” will continue as banks, investment brokerages, and mortgage insurance companies are seriously hurt.  This is in spite of government involvement.  The original premise was faulty!  The presumption was rising real estate values would guaranteed investor interests.   

Now, let’s look at a popular annuity strategy called, “Lifetime Income Riders.”  The rider is coupled to an annuity as an added benefit for a fee.  Most people have no clue as to how they work.  What they hear is, “You will get a big bonus and a guaranteed high interest rate for several years.  When you request your lifetime income, the company will start sending you a monthly check for the rest of your life.  If your account value ever drops to zero, the company will continue paying the monthly check (presumably from the company’s cash reserve).  So, you do not need to worry about anything.  Your lifetime income is guaranteed!

The premise of this “too good to be true” strategy is two fold: (1) few people will actually ask or trigger the rider lifetime income and (2) the account value never drops to zero.  Hopefully, that’s true because there’s no cash reserve to cover the rider income checks!  However, if Baby Boomers trigger the lifetime income option in massive numbers (as I predict) and their account values drop to zero (as I predict could happen), there’s no government bailout to save their retirement in the great depression ahead!  Buyers beware!

MY PROPRIETARY WRITTEN RETIREMENT PLAN

My written plans were patterned after my personal retirement plan.  The original goals were safety and a retirement income from systematic withdrawals.  In my lifetime, I have created a multi-million dollar retirement plan and never owned a stock, mutual fund, or variable annuity.  My wealth was created with fixed indexed annuities.  I have never lost any money!!! 

When withdrawals are needed to supplement my social security, I know exactly the amount in my fixed indexed annuities and the minimum guaranteed interest rate.  You can visualize having the money in a bank account earning a minimum guaranteed interest rate.  (Note: the strategies are actually issued by a life insurance company, not a bank!)  It’s like your parents’ retirement plan; only my approach has the ability to earn double-digit indexed interest rates and never lose money! 

Fixed indexed annuities are offered by life insurance companies and vary widely from company to company.  They have no fees to reduce the account value.  There is no stock market risk.  If you start the annuity with $100,000, you will always have $100,000; plus interest, less withdrawals to spend.  One of my trademarks is “When the stock market dropped, none of his clients lost any money™!” 

There are a few fixed indexed annuities which meet my standards.  In every case, these fixed indexed annuities offer two interest rates options: an annually declared fixed interest rate and an indexed interest rate.  The devil is in the details.   

A.     Fixed Interest Rate:  The Life Insurance Company declares the fixed interest rate.  The rate is set at the beginning of each policy year and changes from year to year.  This is very similar to a one-year CD; except, this option has a minimum guaranteed fixed interest rate.  The minimum guaranteed fixed interest rate is a key feature.      

B.     Indexed Interest Rate:        This interest rate option pays a rate at the end of the policy year based on the performance of the selected stock market index.  The index is a stock market measurement up or down.  When the index is larger today than yesterday, we say the stock market went up!  When the index is smaller today than yesterday, we say the stock market went down.  When the index increases over the policy year, you make money.  If the indexed decreases over the policy year, you may earn zero.  But, your account value never declines! 

A fixed indexed annuity is a long-term contract.  Your money is invested in high-grade corporate bonds.  Laws governing the fixed annuities assure certain tax advantages, lawsuit protection, probate avoidance, and stability.  Withdrawals taken prior to age 59 and a half will incur a 10% IRS penalty. 

To some, the downside is the liquidity – your ability to withdraw all of your money without some sort of penalty.  The annuity may not permit withdrawals during the first year.  Usually, you’re permitted one penalty-free withdrawal annually, but no greater than 10% of the account value.  If you withdraw more than 10%, you may incur a significant surrender charge.  The surrender charge may be as high as 22% depending on the annuity.  The 10% limitation lasts until the end of the “surrender period.”  The surrender period typically ranges from ten years to fifteen years.  Afterwards, the account is fully liquid.

Some companies offer cash bonuses.  For example, a 5% bonus would increase the account value by 5% on the first day.  The bonus is prepaid of interest.  Thus, you should expect to earn lower fixed interest rate over the surrender period, compared to annuities with no bonus.  Also, the bonus annuity usually has a longer surrender period.         

All fixed annuities accumulate interest on a tax-deferred basis until withdrawn.  Therefore, your money can grow faster because you earn interest on dollars that would otherwise be paid as taxes.  Your principal earns interest and the interest compounds allowing you to accumulate more money over a shorter period of time, thereby earning a greater return on your investment.

Even though all annuities provide an option to receive a guaranteed income stream, called annuitization, I am not recommending it.  Rather than exercising your option to choose any number of annuitization features (payment for a specific number of years or an income for life, no matter how long you live) I recommend systematic withdrawals to maintain control.  You can start, stop, and adjust the amount of the withdrawal at any time.

PLAN EXAMPLE

When I sit down with clients, they always want to know the guaranteed systematic income.  Financial planners cannot guarantee this calculation.  Investments cannot guarantee income, but I can!  Using the original account value and the minimum guaranteed interest rate, the calculation is simple!  It’s the worse case scenario! 

If the original account value is $100,000 and the minimum guaranteed interest rate is 2%, the client can withdraw $5,000 for 25 years.  If the client actually earns more than 2%, they will make more money and the money will last longer.  In some years, the indexed interest rate option has generated double-digit rates.

The best risk/return play ahead will come in fixed indexed annuities where your money is invested in long-term high-grade bonds.  Since there is a wide range of risk and return profiles for different investors, I want to keep this simple.  Most people coming to me want something easy to manage and understand.  Harry Dent offers valuable guidance to my clients.  As a Charter Member with a Master Certification, I have direct access to him.  That’s a major advantage to you!

This is a sample illustration.  Your plan may be different, but the primary objective will always be safety.  Every plan needs a cash reserve for emergencies; that’s money in a bank for the unexpected or planned special events. 

This example assumes the couple has $300,000 plus an adequate reserve.  They want $15,000 from the plan to supplement their $30,000 social security benefit.  They feel the $45,000 annual income will be adequate during the depression.

The written plan recommended a highly-rated company offering a 5% bonus using a fixed indexed annuity specifically designed for the next great depression.  My plans are structured to utilize the Harry Dent forecast. 

The key is to know when to use the fixed interest rate option and when to use the indexed interest rate option.  As I stated, Harry Dent forecasts the stock market index will probably earn zero in eight out of the next thirteen years.  Thus, the written plan instructs the client on what to do and when to use the indexed interest rate option to maximize the interest rates!  If the client stays in the indexed rate option in all years, they will probably earn zero most of the time. 

How would such selections change the account values?  I don’t know exactly!  The indexed interest rate can earn double-digit interest rates, but, the plan assumes a conservative 6% indexed interest rate in specific forecasted years and a minimum guaranteed fixed interest rate in the other eight years. 

The illustrated $15,000 income can be changed at any time.  The client always has full control.  They will never annuitize the account.  (Remember, annuitization is when you hand-over the money to the life insurance company and kiss it goodbye.  I do not recommend annuitization!)  Rather, I recommend adjustable systematic withdrawals.  Upon death, the value of the annuities passes to the beneficiaries without going through probate. 

       Year        Withdrawal    Projected Value

           1          $15,000              $305,235                            

         10          $15,000              $274,958

         20          $15,000              $234,872

         30          $15,000              $211,045

         40          $15,000              $168,376

As rule, the plan generally recommends a $5,000 systematic withdraw for every $100,000 in the plan.  For example, a $500,000 plan generates a $25,000 annual income.  You could argue the inflation issue.  Well, there’s no inflation during a depression.  If inflation occurs during the recovery periods, the indexed interest rate is designed permit larger withdrawals.  This plan provides safety, income, easy management, and a lifetime income, no matter what happens!

Encouraging immediate planning, Harry Dent says, “Many will be hurt in the coming months.  Some may be wiped out.  Don’t let it be you – start preparing today!”  You have two choices: you can wait and see, or you can use MONEY STRATEGIES USING SOMETHING GUARANTEED SAFE®!

Many Baby Boomers will look at my approach as temporary wealth protection until 2023.  Then, they will return to the stock market to reap massive forecasted gains of the next stock market bubble boom.  However, I believe they may never risk their money again. 

YOUR NEXT STEP

If you have watched my DVD and read all of the reports, call 888-777-8685 for an appointment to meet in the privacy of your own home.  There are no fees and you will never pay any commissions.  You have nothing to lose!  Those that have ears to hear; let them hear! 

Wally Mackey, RFC, CSA

President, Sycamore Group, Inc.

Copyrights Reserved, 2010