WILL END OF LIFE EXPENSES DEVOUR YOUR ESTATE?

For aging baby boomers, long-term care and home health care are huge concerns, and these concerns form the last part in a series of articles covering what I call the “six circles of wealth.” These six circles break down your personal finance and wealth creation efforts. The goal is to have all of the circles spin at the same time, creating synergy and powerful momentum for your money.

Very few of my clients have all the circles covered, which means your wealth will take longer to grow and be open to much more risk than is necessary. So far, I have covered the first four: income and cash flow, investments, guaranteed income and cash and liquidity. This article discusses the last two: long-term care and your estate.

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The only circle that can cannibalize the others is long-term care. It is also the circle that is most neglected, and most people’s plan for dealing with it is hope and prayer. Most people say “I won’t get that bad where I need a facility or a nurse to come in and help me” or “my family will help me with all of my needs” and even “if I get that bad, just pull the plug or shoot me and put me out of my misery.” Do any of these sound familiar?

Long-term care facilities average $7,200 a month, and according to Genworth Financial, costs are increasing more than 4 percent a year. How long could your nest egg last paying out more than $80,000 per year in today’s dollars? Many people might consider buying a long-term care insurance policy. The American Association of Long-Term Care Insurance says a policy for a 55-year-old costs $723 to $1,590 a year, depending upon benefits — and these figures are from 2009. As with most insurance, if you never need it, your family will not get your premiums back after you pass away.

Asset Reduction Via Estate Planning

One alternative is estate planning, which needs to be done with a quality legal firm that specializes in estate planning and elder law. There are ways to structure your estate that will lessen any blow that you might incur from the cost of long-term care. These usually involve getting rid of assets via gifts and trusts — years before you need long-term care — so when you have to sell off assets before Medicare kicks in its contribution for long-term care, you don’t have many assets left to sell.

This type of planning is controversial because it is seen as pushing the tab on the government even if you have the ability to pay for yourself. So unless you were smart enough to have a quality life insurance product that you bought many years ago, you could be leave nothing behind for your family. Since the traditional financial world tells us to buy term insurance and not whole life, most people will stop paying for expensive term policies as they age because the cost becomes prohibitive. Thus when they are faced with long-term care issues, they must cannibalize their estate or reduce the estate before they have need long-term care. My job isn’t to pass judgment but to pass along the information and let your conscience be your guide.

Asset-Based Long-Term Care

Another alternative is to allocate some of your funds into products that are built to help you with the cost of long-term care. Asset-based long-term care might be as simple as putting some of your money inside of a properly structured annuity. Let’s say you spend $150,000 on a long-term care annuity where you were credited with a 3-1 benefit ratio. Your $150,000 buys you $450,000 of long-term care protection if and when you need the coverage.

What if you never need the coverage and pass away at home in your bed? Then the $150,000 in that account will be part of your estate and given to your family, plus a small rate of growth. Maybe only 3 percent growth, but remember you are not doing this for growth. You have other circles of wealth that are concerned with growth and returns. This is a long-term care and estate planning strategy. You sleep well at night and maintain control of your cash, and if you never need the benefit, your family receives the money plus growth.

Whole Life Insurance

Many of our clients in their 40s, 50s and even into their 60s also set up a high-quality whole life insurance policy. This provides the estate guarantee they want for their kids and grand-kids so if they need to sell off assets to pay for care, they still leave behind their legacy for their family.

One of my favorite books is by Harvey Mackay is called “Dig Your Well Before You’re Thirsty.” These words are even truer when dealing with long term care and your legacy.

Check out The Perpetual Wealth System to learn more!

Cash is King

This is part four in a series on the Six Circles of Wealth. The first three circles are income, investments and guaranteed income. The next is cash, also known as liquidity.

Cash is an essential part of a solid financial fortress. Even the sound of the word evokes an all-over body tingling to most people. The adage that “cash is king” is true, and this is especially true if that cash is used to buy distressed assets at a huge discount. The longer the sales cycle for an asset, the more valuable cash becomes. When you sell stocks, the money usually clears the next day. There is no costly waiting time, as there is when you sell a property or even a business.

When you sell long-saMoney runles-cycle assets, then cash can become an invaluable negotiating tool, depending on the sales situation of the seller. Many people will tell you not to keep much money in cash because you will make no money on the cash (or at least very little). This is a shortsighted view. Having cash in a bank, in cash-value life insurance and even a safe deposit box is invaluable because you can access the money immediately without having to sell an asset at a loss.

A $200,000 House for $100,000 — Today Only

Let’s say you receive a call from your neighbor, who must sell his house immediately. You are familiar with the house and are very confident that it would sell for $200,000 on the open market given time. Your neighbor is pressed for time, due a new job, a new life or whatever. He tells you that he needs to close in three days, and if you can make that happen, he will sell the property to you for $100,000, which represents a 50 percent discount. (I have bought many properties at 20 to 50 percent discounts — as have many people all over the country.) Could you make that happen if you received that call today? If you had the cash, you could write up a purchase agreement and send it to a title company with a rush close. You then wire your funds to the title company and sign some documents and presto you own a $200,000 house for $100,000, which means you have a $100,000 equity profit. Equity profit is not cash profit, but it is real wealth that you can convert back to cash if you so choose.

That money in the bank or your insurance policy — earning .05 percent to 5 percent — has the chance to close to double in 60 to 90 days when you resell the property. Any real estate investor will tell you that to convert that house back to cash will require some holding expenses, a little fix up and selling expenses. When the home resells, you might net $80,000 of profit. The original $100,000 of seed capital goes back into the bank or your cash value life insurance policy along with some interest that you should pay yourself for the loan. Now you are free to do as you wish with the $80,000. Depending on what funds you used to close on the property, you will probably owe short-term capital gains taxes. You could also choose to hold the property and possibly obtain a mortgage from a bank or private lender to pull back out much of your cash. Then you could rent, rent to own, or equity share that property and sell out later for hopefully more money and at a more beneficial tax rate.

Fast access to cash — combined with some education on how to buy distressed assets — can pay off handsomely. If you had all your money tied up in the market or fixed-income assets, then you could not take advantage of that unique opportunity that came knocking on your door.

Waiting for the Opportunity

That $100,000 of cash will buy every $100,000 or less asset on the market (property or business for sale) and it will buy most $110,000 assets, some $125,000 assets, a few $150,000 assets and the occasional $200,000 asset because you can solve problems quickly with that fast cash. Rates of return are not always figured out inside of the product you are in but rather what can you do with that cash when the right opportunity presents itself.

What if it took two years for that opportunity to present itself? Would it still be OK to keep that safe money parked and available at a low rate of return? Of course it would! Never make the mistake of thinking that all your money needs to be invested or in fixed-income assets such as bonds or annuities. Maybe you could educate yourself on how the distressed real estate and note markets work and spend a little time and effort on taking advantage of that market.

Cash parked in a safe, easy-access place would also allow you to take advantage of the next stock market downturn. If you had cash and guts in 2007 and ’08 and decided to take that cash and invest in great companies that are way down due to more of the market than anything internal to the company, you would have made a killing. So when is the next market downturn? Nobody knows, but it is just a matter of time and those with cash and those who are willing to buy when blood is in the streets always create fortunes.

John Jamieson is the best selling author of “The Perpetual Wealth System.” Follow him on Twitter and Facebook.

Guaranteed Income (Part 3)

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Last week, we talked about investing, the second circle of wealth in my series of “Six Absolute Necessities for Acquiring Long-Term Wealth.” The third is guaranteed income. When I study people with successful retirements, filled with abundance and options, almost all have things in common:

  • They carry very little, if any, personal debt.
  • They have stable, secure income from multiple sources that they can set their watch by every month
  • Starting about 10 years before they retire, they begin shifting their assets from riskier investments to low- or no-risk income assets.

A mortgage is generally the biggest debt most of us have. Many argue that you should never pay off your house because the equity you put into it is tied up and not making you money. They might recommend borrowing as much as you can now because interest rates are low.

I say you can have the best of both worlds. First, pay off your mortgage before you retire. By adding small amounts directed to your principle every month, you will take months, even years off your payoff date. When your house is paid off, get the biggest equity line of credit you can. This way, if you see an attractive investment opportunity, you can put your equity to use, and if you don’t, you have removed the pressure of a big mortgage payment in retirement.

If you can pay off your mortgage while you are working, why not now shift that payment over to a solid savings or income product? This could work out to tens of thousands of extra dollars producing monthly income for when you retire.

An abundant retirement is about strong positive cash flow that you can count on for years to come. Do you have any idea how much money you need to retire every month? Do you know where you can get that income from? Do you have enough money for home health care or long-term care? Are you protected from big market downturns during your retirement years? How much will inflation eat into that monthly income needed?

Can You Answer These Questions?question mark

All these questions must be part of an income plan. We calculate these for clients all over the country. First, know how much income you and your spouse will receive from Social Security when you retire. You can get an estimate from the Social Security Administration. If you believe that number is at risk because of issues with Social Security, you better start putting more away and growing it safely.

If you need $5,000 per month to retire and the Social Security for you and your spouse is only $3,500, then you have a $1,500 shortfall. Do you have a pension? How much will that be when you begin to draw it? Do you have a 401(k) or Individual Retirement Account? How long could that account last if you need to draw $1,500 a month — $18,000 in a year? Will you have to pay taxes on what you take out? If you have a 401(k) or traditional IRA, the answer is yes. If you lose 50 percent of your capital to a bear market, how long will you be able to get $18,000 per year?

As you get to be in what we call the “retirement danger zone,” which is 10 years before your projected retirement, you need to start shifting assets away from market risk and over to guaranteed products. A solid fixed indexed annuity with a long-term income rider might be a very good call. I wrote an article about the different types of annuities and how to purchase one that fits your needs.

A lifetime income rider (state and product variations exist) will guarantee that you have a certain amount of income (depending on how much you have in your annuity and at what age you start withdrawing) for you and your spouse’s life. If you live to be very old, your normal retirement funds might run out, but a lifetime income rider guarantees that income stream regardless of what happens to the underlying cash in the account. Also if you have five to 10 years, you have time for that income rider to grow. Many income riders offer 6 percent and more guaranteed growth every year.

When you purchase a $200,000 annuity, many companies might offer a 10 percent bonus on your initial purchase price so your starting amount would be $220,000. When you add compound growth at 6 percent over 10 years, your income rider would top $400,000. Then you would start to draw your lifetime income at 6 percent of the $400,000, giving you $24,000 a year income for you and your spouse’s life. Presto! You have filled your income gap. If you have the resources to purchase another annuity, you might get one with a cost of living clause to hedge against inflation.

John Jamieson is the best-selling author of “The Perpetual Wealth System.” Check out this week’s featured video.

Why Only Investing Is A Suckers Bet

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Last week, I introduced my concept of the six circles of wealth, and discussed the first circle, cash flow. The second circle is investing. Simply defined, an investment is an asset whose value can grow or shrink. Some of the most common investments are:

  • Stocks and bonds.
  • Mutual funds from many different asset classes, including stocks and bonds.
  • Gold and other precious metals.
  • Real estate.
  • Commodities, such as oil, frozen orange juice and wheat.
  • Annuities.

Some are less commonly used:

  • Businesses.
  • Private placements (money is pooled and invested in properties, venture capital, inventions or other assets).
  • Limited partnerships (money is pooled to invest in something a general partner usually has expertise in).
  • Notes and income streams (this includes payments on a note, private contract or annuity).
  • Tax deeds and tax liens (a form of real estate with different rules).

Passive Investments

In passive investments, you have no say in what is done with your money once you invest it. You are relying on other people’s expertise. Examples from above would be:

  • Stocks held for long term (stock trading is more of a business venture).
  • Mutual funds.
  • Gold
  • Annuities.
  • Private placements (assuming you are just a cash investor and not the principle).
  • Limited partnerships

Active Investments

Active investments require more of your time and expertise to make them successful. As a rule, the more effort and specialized knowledge required to make an investment successful, the bigger its potential returns. Examples from the above:

  • Real estate will require you to study values, rents, acquisition techniques, liquidation strategies and other factors. To be a successful real estate investor, you must think build a team of professionals.
  • Business investing will require you to understand the business and the industry and to have a team of professionals and maybe even joint venture partners. There is potential for huge returns and a loss of your entire investment.
  • As the general partner in a limited partnership investment, you are the one with the expertise and time. Many times you will not invest money (although every arrangement is different). You will need a power team and the ability to raise private capital.
  • Discounted notes and income streams will require knowledge of collateral, cash flow, figuring rates of return on discounts and the ability to find private notes for sale.
  • Tax deeds and liens cover parcels (mostly unimproved land) that are auctioned off for back taxes. Great deals are possible, but you need to know the rules (every state and most counties in the state are different), the values, possibilities for land and guarantees offered by the local government.

Maybe splitting your investments between hands-off and hands-on programs makes the most sense. You might need to spend some time educating yourself to make hands-on investments succeed. Simply book time in your schedule to read, listen to CD’s, and attend workshops that will help your eventual goal of solid hands on investing returns.

More Than Just Investing

Many people might think I have left out certificates of deposit, savings accounts and life policies as investments. These are important parts of your wealth plan, but since they are guaranteed, risk-free products — you can’t lose money in them — they fall into other circles.

I also don’t include options on stocks or commodities in the investing circle. Most of the time, options are very short-term cash-flow plays. They require the stock or commodity you’ve bought options on to move a certain way fast if they’re going to pay off (up for call options, and down for put plays). They’re more a quick cash-flow generator rather than a longer-term investment strategy.

Far too many people make the mistake of just focusing on their investment circle while letting other circles fall into disrepair. Picture the six circles of wealth operating in a balanced way. When one circle gets too heavy or out of control, all the other circles suffer. When you understand this (and so few people ever do) you can take steps to balance out the circles and create a financial fortress.

John Jamieson is the best-selling author of “The Perpetual Wealth System.” Follow him on Twitter and Facebook.

6 Circles of Wealth: Positive Cash Flow (Part 1 of 6)

Six essentials that I call the Six Circles of Wealth operate in conjunction to provide long-term and rock-solid wealth. And an optional seventh provides a huge bonus.

The six are:
1. Positive cash flow
2. Investments
3. Guaranteed income
4. Liquidity
5. Long-term care
6. Your legacy.

The seventh is business ownership and the eventual sale of the business. We will break down each area for the next six Tuesdays.

The Flow of Cash

A positive cash flow simply means that you have more income than expenses month after month and year after year. It is not gross cash flow (although the more you bring in, the better off you generally are), but net cash flow.

Say you and your spouse have a gross household monthly income of $9,000. After taxes, Social Security and the other mandates, your combined adjusted gross income is $6,000 per month. From this adjusted gross come out all your expenses, such as housing, autos, utilities, saving for retirement, groceries and entertainment. This example yields $800 net positive cash flow.

Take 45 minutes and add up all your income and all your constant expenses and see how positive — or how negative — you are every month. Set aside 5 percent of your income (out of your checking account) for unforeseen expenses, such as the hot water tank blowing up or the roof leaking. It has been said that life is just one darn thing after the other, so plan to have a cash reserve for them.

If you determine your cash flow is negative, then the first thing you should do is anything that gets your cash flow positive. The best and fastest way to do that is to cut your expenses. My fellow DailyFinance contributor Brian O’Connor has written a series of articles on how to save $1,000 a month. I recommend you read these and pick out a few gems you could use.

Make More Money

The next step is to make more money. This is the greatest time in history to start a simple small business from your home. You could also plan for a new job and maybe even a new profession. Or you can make more money in your current job. Before you ask for a raise, spend the next 90 days and make yourself more valuable to your boss and to your team. Your pay is very much associated with how much value you really bring to the table for the employer.

Your boss and coworkers do not care that your cash flow is not good. They only care what you can do for them, so prove you can do more and should be paid accordingly. It has been said that most employees do just enough not to get fired, and most employers pay just enough so you won’t quit. Make a commitment to yourself that you will go the extra mile at work.

Start by checking your attitude and monitor self-talk at all points during the day. You hate your coworker? Find things you can like, focus on those points and build a bridge to your coworkers. If you do this for the next 30 days, you will change for the better — and your boss will notice. Follow through hard for another 60 days and really change people’s perception of you to an integral part of their operation. Track all the extras in your journal.

Now Is the Time to Ask for Your Raise

Set up a time to speak with your boss and come into the meeting and say how excited you are to be with the company and how much you like working on whatever you are doing. Now ask for your raise based on the last 90 days. Ask for more than you think you will get, but only you can know how much that figure is at your company. Many times you will walk out with that raise, and if you don’t, ask your boss if you could have another meeting in 60 days to review. During that 60 days, become more valuable and keep asking until you get your raise. If it does not happen, start a job search for another position with the company. This would also be a good time to start working on your own small business.

A strong positive cash flow is the first requirement for creating wealth and a fantastic future. So look hard at your expenses and your income and work at increasing your positive cash flow.

Visit us at Perpetual Wealth Systems for more information