Retirement Plan Limits for 2012

by Richard F. O'Boyle, Jr., LUTCF, MBA

The Internal Revenue Service is boosting the maximum contribution that workers can make to their 401(k), 403(b) and most 457 retirement plans without paying upfront taxes. The limit will rise by $500 to $17,000 for 2012. Workers over 50 can add another $5,500 to that. Individuals may still contribute $5,000 to traditional IRAs or Roth IRAs, or $6,000 if older than 50.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

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Should I Replace My Life Insurance or Annuity Policy?

by Richard F. O'Boyle, Jr., LUTCF, MBA

Life insurance and annuity contracts are intended to be medium- to long-term agreements. Term life insurance policies often have 20-year durations, and many annuity contracts have 8-year surrender periods. But in some cases, it makes sense to cancel or replace a contract with a new one. When should you cancel or replace your life insurance or annuity policy?

You may consider making the change if:
- The term is expiring on your old policy and the rate is sky-rocketing;
- Your health has improved from the time when you originally applied for your policy, for example, you may have quit smoking, lost a lot of weight, controlled diabetes, or passed five years after cancer. Many companies will allow you to take a new medical and keep the existing policy with a new lower rate;
- The rate on a permanent policy may have become unaffordable and it is at risk of lapse. Consider reducing the death benefit (and thus the premium) or using cash values and dividends to pay the premium over the short term;
- Companies change the contract terms on newer policies for Universal Life from time to time. Consider switching to a different UL policy if the crediting interest rate or guaranteed minimum are better or if the monthly costs of insurance are lower. Keep in mind that as you get older your underlying costs get higher;
- A 1035 exchange allows you to transfer the cash values of a life insurance policy or annuity contract directly into a new contract without exposing the cash to taxation. Again, make sure that the terms of the new contract are more favorable. With an annuity, you should check the guaranteed minimum interest rate, since on older contracts it may be much higher.

New York requires a lengthy process to replace a life insurance or annuity contract. This is designed to ensure that both you and your agent “do the math” to make sure the new policy costs are fully disclosed, that the new policy is suitable for your needs and you both quantify the costs and benefits before changing plans.

When considering replacing or cancelling your life insurance policy, keep in mind that by starting a new policy, you have a new two-year “contestability” period where there might be limits on the payout of the death benefit. Never cancel a policy until the new policy is in force, even if it means paying premiums for both policies for one month.

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Book Review: “Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP

Book Review: “Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP (John Wiley & Sons, Inc., 2004)
by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com


We’re taught to save throughout our working years to fund our retirement – diligently socking money into our 401(k)s and paying down our debt. But once we flip the switch and settle into a presumably worry-free retirement, how do we effectively and efficiently spend down our assets in those golden years? Ray Lucia, a Certified Financial Planner with a celebrity’s flair, helps us to answer this tough question with his “buckets of money” planning strategy.

The gist of “Buckets of Money” is that our nest eggs should be separated into three “buckets” of ultra-safe income streams, conservative medium-term assets and aggressive stock funds. Over seven-year cycles, the funds are depleted and shifted into the next immediate bucket to be used for current income. The buckets strategy leaps the key retirement planning hurdle by providing safety, growth, diversification, tax-efficiency and lifetime income. The book identifies which investments are appropriate for which buckets, along with guidelines for the proportions of each.

The book reads like a infomercial, but don’t let that turn you off. The general discussion of asset classes and products (stocks, bonds, annuities, etc.) is valuable for the novice and experienced investor alike. His comprehensive perspective honestly allows him to cover all potential investment classes. Mr. Lucia isn’t trying to sell you on anything other than his planning strategy (and he does that well).

Mr. Lucia’s website contains some notes on changes, but I’d like to see a fully updated edition of the book. For example, the buckets strategy recommends real estate holdings of as much as 20% of a portfolio in the form of real estate investment trusts. Given the 2008 mortgage meltdown, perhaps that should be reconsidered. Mr. Lucia only skims past the important backstop that life, disability and long-term care insurance provide as we switch our retirement portfolio from accumulation mode to distribution mode. Fortunately, the author takes into account the complexities of the tax code since intelligent tax planning can make or break a retirement plan. The book’s numerous statistical examples remain useful today.

The worksheets included in the book are quite easy to use. While the potential to “do it yourself” is there for the experienced investor who has a trusted advisor, I wouldn’t recommend that an individual adjust her portfolio without consulting a professional. I’m not sure if the buckets strategy is an “all or nothing” approach to investing. Any retirement plan can benefit from the non-controversial concepts presented here.

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Fee-based vs. Commission-based Financial Planners: The Pros and Cons

by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com

Throughout this article, I have referred to “financial planner” in the general sense to indicate advisors who work with life insurance, annuities, disability coverage and retirement planning. A “Certified Financial Planner” is a specific professional designation.

It’s common knowledge that you have to spend money to make money and having a professional financial planner in your court is a smart investment, but should you go with an advisor who charges you a flat fee or one who works on commission?

There are certainly pros and cons to each type and it may boil down to the financial planner you feel most comfortable with, regardless of how they make their living. When looking for any type of professional help, it’s always a good idea to seek out recommendations. Ask friends, family or co-workers what their experiences have been with financial planners and see if they think highly enough of theirs to give a good review. Reputation is everything in this field, so try to avoid inexperienced, poorly reviewed investment advisors.

Fee-based financial planners work by the hour, which may sound simple enough. They charge a set hourly fee or, in some cases, a flat fee for their services. The catch is, most fee-based planners also earn commission based on the financial products they sell. This can cause a conflict between your interests and theirs and your portfolio may end up suffering for it.

There are several different ways that fee-based planners charge:
- A percentage of assets under management
- Flat fees in the form of an annual retainer
- Hourly fees with a cap on the total amount
- Any combination of the above

It should be noted that “fee-based” is not the same thing as “fee-only.” Investment advisors who only charge a fee may be more impartial because they only work for the fees charged to clients, whether that is an hourly fee or an a la carte rate. Generally, fee-only financial planners focus on analyzing portfolios as a whole, so they have to be well versed in all areas. These include college financial aid, real estate, retirement and much more. With no commission to worry about, they might not pressure you into any products or investments. It’s in their best interest to grow your assets, since they may be paid more over time.

Commission-based financial planners are the opposite of fee-only advisors in that they earn money solely on the investments they sell. Most life insurance agents are paid commissions by the insurance company when they place a case. Remember, the insurance company pays the advisor the commission, not the client. When working with a commission-based advisor, you need to be sure that they respect your choices and share with you the available options. If it feels like the advisor is being overly forceful with a certain type of investment, especially one that you are not comfortable with, that’s a sure sign that they are thinking more of themselves than your portfolio.

New York requires life insurance agents to disclose when they are paid by commission. Commission rates on fixed annuities, term life insurance or whole life insurance are generally consistent across all insurance companies. It’s rare to have a company pay much higher than average commissions, unless it’s a product like a variable annuity, indexed annuity or life insurance contract.

Some investors may be best suited to having a good commission-based advisor:
- Investors with small portfolios that require much less management
- Clients who needs a basic review or analysis of their portfolio
- People looking for a specific product such as life insurance

Commission-based advisors may have access to better facilities and other financial professionals such as analysts and traders etc. They may also have the backing of a respected and renowned firm. Most fee-based advisors work independently, although they may have past experience as a commission-based advisor.

Regardless of how your advisor gets paid, remember that they are the financial professional and have the experience, education and drive to see your investments succeed, so take any advice to heart, even if you don’t act on it. If your commission-based advisor pressures you into active trading, because this is one way they receive bigger commissions, remind them that they are working for you, not the other way around. Always clarify how your advisor is being paid, if they don’t come right out and tell you at the outset.

No matter how you pay your financial planner, saving money and increasing your investments should be their top priority. The commission vs. fees debate is a hot topic in the world of financial planning, but it’s always best to work with someone you can personally trust, regardless of how they come by their paycheck.

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Understanding Insurance Company Financial Ratings

Understanding Insurance Company Financial Ratings
by Richard F. O’Boyle, Jr., LUTCF, MBA

Triple A, Gone Away

Well, it’s official: The United States Government no longer has a perfect credit score. On August 5, 2011 its credit rating was lowered by Standard & Poor’s to AA+ from AAA. The rating on the debt of the federal government and some specific agencies such as mortgage giants Fannie Mae and Freddie Mac was lowered because S&P deemed it more risky due to the ballooning federal debt and the inability of the political process to reform entitlement programs.

In theory the four top rating agencies – Standard & Poor’s, Moody’s, A.M. Best and Fitch’s – are the arbiters of the Country’s credit score. Despite all the sound and fury from the politicians in Washington, there are some real-life implications for people on Main Street. The lowering by S&P by one notch effectively brings the country’s FICO score down to something like 775 from 800.

It’s not that dramatic since only one of the top four rating agencies took such a drastic approach (the others said the Government’s problems are long-term and would not immediately affect their ratings). I’d like to note that some smaller agencies had already taken the politically unpalatable step of lowering the country’s rating. Let’s also keep in mind that S&P has been under serious political pressure to “get real” about its rating since it did such a pathetic job of rating all of those toxic mortgage-backed securities (see “The Big Short”).

Given all of the political pressure from Congress regarding the mortgage securities fiasco of the last three years, it’s ironic that they should come to downgrade the U.S. Government’s rating. Expect to see “show trials” (i.e., Congressional hearings) in Washington demonizing the rating agencies. Again, it’s ironic since the U.S. has been less than reliable when accounting for future liabilities such as Social Security and Medicare.

But, again, let’s put politics aside and investigate the “real life” implications of the aforementioned “downgrade:”

Insurance Company Ratings: What Do They Mean?

In tandem with the downgrade of the Government’s credit rating, S&P also lowered the AAA rating of a handful of the most stellar insurance companies. They also put the rest of the insurance industry on a “Negative” outlook (downgraded from “Stable”), mainly because of the heavy exposure they all have to U.S. securities in their reserve portfolios.

Companies downgraded to AA+ (Negative Outlook) from AAA (Stable Outlook):
New York Life
Northwestern Mutual
Teachers Insurance & Annuity Association (TIAA-CREF)
Knights of Columbus
United Services Automobile Association (USAA)

Companies rated AA+ with “Stable Outlook” reduced to “Negative Outlook:”
Guardian Life Insurance Company of America
Berkshire Hathaway, Inc.
Assured Guaranty Corp.
Massachusetts Mutual Life Insurance Co.
Western & Southern Financial Group, Inc.

Does this mean that your life insurance company is about to go bankrupt ? Most likely, not. What it does mean is that S&P has decided that insurance companies that invest heavily in one country’s bonds can not have a higher credit rating than the actual bonds that they hold. So, in lockstep, if the U.S. rating goes down, so must the companies that hold a lot of U.S. debt. Needless to say, the affected insurance companies say they are unfairly being hit due to Washington’s political gridlock and that they still merit AAA ratings.

Going forward, the insurance companies will bolster their overall credit ratings by selling off their lower quality assets and buying higher quality ones. This may effectively improve their balance sheets over the long term and even increase their exposure to U.S. debt instruments. S&P maintained AAA ratings on many municipal bonds, so there still are high-quality assets for the insurance companies to put into their reserves. The reason the top handful of companies actually had the best ratings is that often they are better judges of quality than even the rating agencies.

The lowering of the U.S.’ credit rating, in the immediate term, has not led to a sell-off in U.S. Treasury assets. But indeed, we have seen a “flight to quality” as many investors see the U.S. Treasury Bonds as the “cleanest shirt in a hamper full of dirty shirts.” (I believe I can credit economics guru Nouriel Roubini for this analogy on Bloomberg Radio). In effect, U.S. assets at AA+ are still better quality than many European bonds.

Ultimately, the jury is still on whether interest rates on mortgages and credit cards will spike up. Longer term interest rates will be affected more by the strength or weakness of the overall economy and the amount of stimulus provided by the Federal Reserve and Congressional budget committees.

Why Ratings Still Matter

So why do we even care about ratings attributed to countries or businesses or individual financial products? Haven’t the rating agencies done an awful job to date? Are the folks with the green eyeshades who are crunching the numbers and giving their seal of approval so corrupted by the profit motive or fearful of political retaliation that they can’t “do the math” objectively?

In short, there are two reasons: First, we need some type of financial yardstick to compare countries, companies and bonds. There really are no guarantees associated with a rating of “AAA,” for example. It’s just a relative measure and only useful when compared to something with a “B+,” for example. Secondly, a rating gives us the assurance that someone who is somewhat objective with some kind of sophisticated financial education has looked at all the footnotes and read all the fine print… because G-d knows nobody else has (sometimes not even the salespeople). Of course, recent events have dramatically shown that the current system has failed. Unfortunately, it’s the only system we have.

So let’s take a look what the ratings of life insurance companies really mean. Given the hundreds of life insurance companies offering policies in the U.S. it can be a challenge to compare their relative financial strengths and ability to pay claims. The top rating agencies review in detail the accounting statements of publicly traded companies as well as private or mutual life insurance companies. Based on their reviews and further research into competitive intelligence and other sources, they will give an opinion on the credit-worthiness of the life insurance company and assign letter grades to each company and its subsidiaries. Furthermore, agencies will often note what direction they think future rating will head in their “outlook” for the company or industry.

Keep in mind that while the core attribute the rating agencies look at is “financial strength,” they also take into account how well the company operates as a business, the size of their market share, exposure to other businesses (such as investment management advice or property & casualty lines) and overall business mix. For example, every year, S&P positively noted New York Life “outstanding field sales force” as a competitive advantage.

How to Compare Life Insurance Company Ratings From Different Agencies

I’m a big fan of the old adage, “Life is too short to drink bad wine.” With the hundreds of available life insurance companies out there, does it make sense to go with a middle-tier company when there are already so many top-notch ones? Similarly, with all the five star mutual funds rated by Morningstar, why would you invest in a three star fund? A life insurance company’s rating is effectively a guide to its underlying financial strength and its ability to pay its claims when the time comes for you to collect the death benefit.

Keep in mind that many companies have subsidiaries that have similar sounding names (often due to state regulations or their own business strategies). When researching your specific company make sure that you are looking at the actual company that is underwriting the life insurance contract. For example, “MetLife” may actually be “MetLife Investors” if it is the 30-year term plan in New York. Your agent should be able to give you the exact company name. Your state insurance commission will have regular filings from each company that sells life insurance it that state.

Each rating agency uses its own proprietary methodology and mathematical model to assess the strength of the insurance companies they review. They look at factors such as the quality of the insurer’s assets and reserves; their source(s) of funding; profitability based on a review of public financial records and filings; market share in different product categories; management talent; and competitive market analysis compared to other insurers.

Here’s how the various rating agency “grades” match up:

Rank	A. M. Best	Standard & Poor's	Moody's	Fitch	Numerical Grade (*)	Comdex Score (#)
1	A++ Superior	AAA Extremely Strong	Aaa Exceptional	AAA	9.0	100
2	A+ Superior	AA+ Very Strong	Aa1 Excellent	AA+	8.3
3	A Excellent	AA Very Strong	Aa2 Excellent	AA	8.0	90
4	A- Excellent	AA- Very Strong	Aa3 Excellent	AA-	7.7
5	B++ Good	A+ Strong	A1 Good	A+	7.3
6	B+ Good	A Strong	A2 Good	A	7.0	80
7	B Fair	A- Strong	A3 Good	A-	6.7
8	B- Fair	BBB+ Good	Baa1 Adequate	BBB+	6.3	70
9	C++ Marginal	BBB Good	Baa2 Adequate	BBB	6.0
10	C+ Marginal	BBB- Good	Baa3 Adequate	BBB-	5.7
11	C Weak	BB+ Marginal	Ba1 Questionable	BB+	5.3
12	C- Weak	BB Marginal	Ba2 Questionable	BB	5.0	40
13	D Poor	BB- Marginal	Ba3 Questionable	BB-	4.7
14	E Under Regulatory Supervision	B+ Weak	B1 Poor	B+	4.3	20
15	F In Liquidation	B Weak	B2 Poor	B	4.0
16	S Suspended	B- Weak	B3 Poor	B-	3.7
17		CCC+ Very Weak	Caa1 Very Poor	CCC+	3.3
18		CCC Very Weak	Caa2 Very Poor	CCC	3.0
19		CCC- Very Weak	Caa3 Very Poor	CCC-	2.7
20		CC Extremely Weak	Ca Extremely Poor	CC	2.0
21		R Regulatory Action	C Lowest	C

(*) Numerical Grade conversions courtesy of The New York Times
(#) Comdex ranks insurance companies based on what other rating agencies have given them. The companies are then graded on a percentile system with only the top five companies in the 100th percentile, and others falling into the scale below that. The placement of the numerical rankings in the chart is my approximation.

Links to Rating Agencies
AM Best
Fitch
Moody’s
Standard & Poor's
Weiss
Comdex Score

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Three Simple Steps to Avoid Probate

Tricks of the Trade: Three Simple Steps to Avoid Probate
by Richard F. O'Boyle, Jr., LUTCF, MBA

Much is said about the value of avoiding probate, the legal process where your will (if you have one) is validated and its provisions carried out. Complicated estates can be tied up for years with legal maneuvering and family wrangling. Most cases are straight-forward and uncomplicated – but they can still be time-consuming and emotionally draining.

First, you can free up some resources for your heirs by carefully naming them as beneficiaries on savings and checking accounts, adding them to the title of a car or boat, or including them on the deed of a piece of real estate. Designating some assets as “payable on death,” “transfer on death” or “in trust for” can accelerate the transfer of these assets to your intended beneficiaries. They just need to show copies of their identification and your death certificate to the bank or motor vehicles department.

If you are concerned that your heirs will have trouble paying taxes or expenses immediately after your death, carefully take stock of your smaller assets. This is particularly helpful for people who do not have a will or are not legally married to their spouses. You can free up these resources for them while the estate works itself through the probate process.

Second, most of your big assets such as your house, life insurance, pension, retirement plan or investment account should already have named beneficiaries or joint owners, which means they pass to the intended person (or trust) immediately upon death and avoid probate. Make copies of the signed and dated beneficiary designation forms and keep them in a safe place with your other financial records. Banks and insurance companies are not infallible – they lose these documents all the time! Make sure that you name contingent beneficiaries and tertiary beneficiaries. The last thing you want is for these important assets to wind up in your estate. They will be subject to death taxes, the vagaries of the probate process and (in the case of IRAs) immediate taxation.

Finally – but most importantly – make sure that you have a will. While this doesn’t “avoid” probate, it simplifies the process dramatically. If you have minor children, an unmarried spouse or even remotely complicated family affairs, at a minimum you should have a simple will. Attorneys can prepare a simple will for a few hundred dollars or you can use a software product or online service for a fraction of that cost. If you don’t already have a will, or it hasn’t been updated since you have had major changes in your life, make it a point to get one signed before the end of the year.

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Book Review: “Buckets of Money: How to Retire in Comfort and Safety”

“Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP (John Wiley & Sons, Inc., 2004)
by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com


We’re taught to save throughout our working years to fund our retirement – diligently socking money into our 401(k)s and paying down our debt. But once we flip the switch and settle into a presumably worry-free retirement, how do we effectively and efficiently spend down our assets in those golden years? Ray Lucia, a Certified Financial Planner with a celebrity’s flair, helps us to answer this tough question with his “buckets of money” planning strategy.

The gist of “Buckets of Money” is that our nest eggs should be separated into three “buckets” of ultra-safe income streams, conservative medium-term assets and aggressive stock funds. Over seven-year cycles, the funds are depleted and shifted into the next immediate bucket to be used for current income. The buckets strategy leaps the key retirement planning hurdle by providing safety, growth, diversification, tax-efficiency and lifetime income. The book identifies which investments are appropriate for which buckets, along with guidelines for the proportions of each.

The book reads like a infomercial, but don’t let that turn you off. The general discussion of asset classes and products (stocks, bonds, annuities, etc.) is valuable for the novice and experienced investor alike. His comprehensive perspective honestly allows him to cover all potential investment classes. Mr. Lucia isn’t trying to sell you on anything other than his planning strategy (and he does that well).

Mr. Lucia’s website contains some notes on changes, but I’d like to see a fully updated edition of the book. For example, the buckets strategy recommends real estate holdings of as much as 20% of a portfolio in the form of real estate investment trusts. Given the 2008 mortgage meltdown, perhaps that should be reconsidered. Mr. Lucia only skims past the important backstop that life, disability and long-term care insurance provide as we switch our retirement portfolio from accumulation mode to distribution mode. Fortunately, the author takes into account the complexities of the tax code since intelligent tax planning can make or break a retirement plan. The book’s numerous statistical examples remain useful today.

The worksheets included in the book are quite easy to use. While the potential to “do it yourself” is there for the experienced investor who has a trusted advisor, I wouldn’t recommend that an individual adjust her portfolio without consulting a professional. I’m not sure if the buckets strategy is an “all or nothing” approach to investing. Any retirement plan can benefit from the non-controversial concepts presented here.

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Book Review: “The Complete Guide to Reverse Mortgages,” by Tammy Kramer and Tyler Kraemer

“The Complete Guide to Reverse Mortgages,” by Tammy Kramer and Tyler Kraemer (Adams Media, 2007)
by Richard F. O'Boyle, Jr., LUTCF, MBA
"The Insider's Guide to Retirement and Insurance Planning"
http://www.retirementandinsurance.com


Tammy and Tyler Kraemer do professional advisors and consumers a valuable service by demystifying reverse mortgages. The sale of reverse mortgages has boomed in the past 20 years as house-rich/cash-poor retirees seek to tap into their home equity to fund their golden years. “The Complete Guide to Reverse Mortgages” details and explains the many benefits and pitfalls of these complex and poorly understood financial products. Every professional advisor should read this book, along with every consumer seriously considering one.

Over the last three or four years I have seen a surge in published articles (good and bad) on reverse mortgages. This is mainly because our retirement investments have failed to produce the expected pile of money to live off of. Up until 2008 (the year after this book was published) our home values had increased beyond rationally expected levels. The perfect storm of crashing investment accounts, crimped budgets and plummeting home equity values makes the consideration of a reverse mortgage even more pertinent.

“The Complete Guide to Reverse Mortgages” is a consumer-friendly volume with useful worksheets and illustrations. If you are a senior considering a reverse mortgage (or adult child of one), take 30 minutes to pencil through the worksheets. Better yet, sit down with a financial advisor or mortgage specialist and do them together. Don’t hesitate to float the idea past intelligent friends, your family attorney or a neighborhood insurance agent. The consumer is well-advised to carefully network to find a reputable reverse mortgage specialist. You may bring any financial advisor along with you to a consultation. By speaking with a variety of advisors, you will be sure to explore the fullest spectrum of options. This is a financial purchase you should be extremely cautious about because it’s a long-term commitment.

Many things have changed in the reverse mortgage market since the 2008 financial meltdown so on February 25, 2011, I spoke with Jim Calimopulos, Reverse Mortgage Sales Manager at Worldwide Capital Mortgage Corp. in Bay Shore, NY.

Mortgage rates and the costs of reverse mortgages in general have increased, and property values have decreased, which means that less money is ultimately put into a consumer’s pocket when they take out a reverse mortgage. The highly publicized failure of IndyMac bank (one of the largest reverse mortgage providers) has fortunately not made a great impact on the availability of these products to consumers since other companies such as Financial Freedom and MetLife continue to be strong players.

Since 2010, the Department of Housing and Urban Development’s Home Equity Conversion Mortgage program has sought to lower some costs and provide more options to consumers. As Mr. Calimopulos explained, if a couple is downsizing their home and moving into a new home, they can greatly benefit from the HECM program. For example, if they sell their home for $300,000 and then buy a $250,000 home in a 55+ community, they can still get a reverse mortgage for up to $190,000 on the new property. Ultimately, the couple will have about $110,000 in cash to put aside for use in the coming years.

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Book Review: "The Retirement Savings Time Bomb... and How to Defuse it"

by Richard F. O'Boyle, Jr., LUTCF, MBA
"The Insider's Guide to Retirement and Insurance Planning"
http://www.retirementandinsurance.com

Thank goodness Ed Slott, author of “The Retirement Savings Time Bomb… and How to Defuse It,” has a good sense of humor, because while he looks harmless, his message is nothing short of apocalyptic. Your hard-saved retirement plan is at risk from something worse than inflation or stock market gyrations – the burdensome taxes you and your loved ones will have to pay once you start living off your savings or try to pass them on to your heirs.

Ed Slott, a nationally recognized tax expert, gives us a startling wake-up call – with careless planning, we can not only miss out on potential tax benefits, but punish ourselves (and heirs) with excessive tax bills. There are literally hundreds of “loopholes” and planning techniques mentioned in the book. It is an exceptional reference volume for the professional planner and the retiree alike. There is just enough information here to be dangerous for the person who thinks they can “do it themselves.” A word of caution: tax rules change frequently so don’t try these techniques without the close cooperation of your advisor and tax planner.

Throughout the book, Mr. Slott exposes us to the bewildering tax maze that applies to our retirement plans. It’s easy to get overwhelmed, but I advise the reader to not be alarmed, because many of the worst pitfalls can be easily avoided. Secondly, some of the complex strategies may never apply to your personal case. Nevertheless, it’s useful to open your eyes to some of these issues, just in case.

This book is like the manual for your DVD player. You probably won’t read it cover-to-cover, but you certainly should have it handy when:
- you open an IRA account
- you change jobs
- your spouse or parent dies
- you are setting a retirement date
Mr. Slott’s “Professional Publications” and “IRA Information Websites I Use” resources are solid gold. The appendices, likewise, are valuable, especially the glossary.

My clients would love to have massive IRAs that they don’t expect to exhaust in their lifetimes. Unfortunately, most people are more concerned with just having enough in this lifetime alone rather than maximizing their kids’ inheritance. Examples of valuable gems in the book include:
- Net Unrealized Appreciation (NUA): If your company retirement plan allows you to buy company stock, you can segregate it when you retire and possibly pay a much lower tax rate on it;
- Stretch IRAs for Beneficiaries: This simple concept is repeatedly emphasized as a way to allow a second generation of IRA beneficiaries drag out the requirement that they pay taxes on their inheritance while letting the account value compound over a longer period of time;
- Life Insurance Strategies: Mr. Slott is a vocal proponent of retirees holding life insurance as a means of leveraging assets and providing more options to both the spouse and children. For large estates, life insurance proceeds are an essential resource to pay estate taxes.
- Non-spouse Beneficiaries: We automatically assume that our legally married spouse is the logical beneficiary to our retirement plan. That’s not always the case, nor is it ever an option for gay and lesbian couples.
- Contingent Beneficiaries: Always name a contingent beneficiary to avoid the possibility that your estate will inherit your IRA, and also to give your spouse the option to disclaim the inheritance.
- Keep copies of your beneficiary designation forms since you can’t assume that your financial institution or bank will have them when your heirs need to prove that they are the rightful beneficiaries.

Mr. Slott was gracious enough to take the time from his busy schedule to speak with me on March 9, 2011:

[Richard O’Boyle] One of your most important points in the book is your emphasis on properly designating beneficiaries. When you name a non-spouse as a beneficiary of a non-IRA retirement plan (either because your spouse predeceases you, or you are not legally married, for example), what are the issues to consider?

[Ed Slott] First of all, if you have a non spouse, they don’t have the same benefits and legal protections as a spouse. Even if you are remiss or sloppy, the proceeds of an account will likely go to the spouse any way. If you want a person to get the plan, make sure that they are properly listed as the beneficiary on the form. Everybody thinks that the banks or financial institution will have a copy of the form when the time comes, but institutions can be very sloppy. If the bank doesn’t find that form, big tax benefits can be lost, and your intended beneficiary may not ultimately get the account. A beneficiary form trumps the will and any other legal documents. When we think of “non spouse beneficiaries” we often think of our children – and I got this point from your blog – very few people think “unmarried partner”… a gay partner is a non spouse beneficiary. Even if they are married under state law, under the federal tax code, they aren’t. The most important point for same sex partners is to make sure they name each other as beneficiaries on the form.

[O’Boyle] Trusts can be inordinately complicated, even for the experts, which is why I suspect many families close their eyes to their value. How can non-married couples preserve their wealth without getting overwhelmed by complex documents and expensive legal fees?

[Slott] Again, using beneficiary forms is the most direct and foolproof was to make sure your wishes are followed. Maybe some other family members don’t approve of your relationship. Trusts are a way to make sure the property goes to your partner. If your main concern is to make sure they get it, it can get done simply through the beneficiary form. Trusts are for other issues, not necessarily tax issues. For example if the intended beneficiary is a minor, disabled or incapacitated, or it is a beneficiary who can’t handle money. If that’s an issue then you go the trust route. If these aren’t issues, then you might not need a trust. The beneficiary form is iron clad and it trumps even what may be stated in a will.

[O’Boyle] There actually still are plenty of people who have pensions provided by their unions or employers. How can gay couples get the same benefits as legally married couples when it comes to survivorship and continuation of pension benefits?

[Slott] The only way is to name them as a beneficiary. Now, I’m not an expert in all these plans and you will have to go plan by plan so see if you can even name a non spouse as a beneficiary. Another way to do it is to take some IRA or pension money out – you will have less pension benefit – but you transfer that money into a life insurance policy and the surviving partner gets a chunk of money through life insurance. That’s a much better way to make sure there is money than trying to go through a complicated pension plan.

[O’Boyle] Nobody knows where tax rates are headed, but the conventional wisdom is that they are headed higher. If rates increase dramatically, where should people shift their future retirement savings?

[Slott] That’s an easy one: a Roth IRA, because a Roth IRA is a hedge against the uncertainty of tax rates going higher. You don’t have to worry if tax rates go to 50 or 60%. You don’t have to worry because you have locked in a tax free asset. Of course you pay the taxes up front now. It really doesn’t matter how high they go. You can set that up right now.

[O’Boyle] I can count the number of “insurance positive” celebrity advisors on one hand. By that I mean the number of financial professionals who get significant air time who are strong proponents of cash value life insurance as a part of a retirement plan. Why does cash value life insurance get such a bum rap?

[Slott] I’m not an insurance guy, nor am I am expert in stocks, bonds or investments. I like life insurance as a tax vehicle. I believe it’s the single best benefit in the tax code because it gives you the ability to take small amounts of money and leverage it tax free. All I care about is the tax benefits and if it pays out at death. The kind of life insurance is up to you and your advisor. Some people just want the most insurance for the least money. But as you get older you probably will be better off with cash value life insurance. The term premiums get astronomical and you have nothing to show for it.

"The Retirement Savings Time Bomb... and How to Defuse It" is available from Amazon.com.

(c) 2011 Prism Innovations, Inc. All rights reserved.

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How to Reamortize Your Mortgage

by Richard F. O’Boyle, LUTCF, MBA

Many people refinance their mortgage in the hopes of lowering their monthly payments, but there’s a little-known trick that can lower your monthly mortgage bill without a costly and hassle-prone re-fi. The last thing the banks want you to do is shorten your loan, reduce your interest rate, or lower the lifetime interest paid: that’s why they push refinancing. They want to sell you a new mortgage with all the attendant fees and lock you in for another lengthy term.

A reamortization, also known as a recast or a principal curtailment modification, will lower your monthly payment without a new mortgage loan. The bank will recalculate your current mortgage (using the same term and interest rate) and lower the required principal and interest payments going forward. Over the life of the loan, the total interest payments will also be lower. This strategy only works if you have been paying additional principal towards your mortgage over the years or you have a lump sum now that you want to pay.

Many loan officers don’t even know what a reamortization is! And banks don’t make it easy for you. They will charge a fee of about $200 and then drag things out for a few months. They may even require you to have your mortgage prepaid for a month in advance while they shuffle their paperwork. But if your monthly payment goes significantly lower, it may be worth the effort. After recasting your mortgage, you can still continue to make additional principal payments and then do the process again in a few years.

If you decide that recasting makes sense for you, be prepared:
- Have a lump sum (perhaps from a bonus from work or an income tax refund);
- Call your mortgage company and track down their recasting specialist and get a direct dial phone number and mailing address;
- Ask them to calculate your new recasted payment amount and to quote you the fee;
- Draft a letter of request for the recast (or whatever their bank calls it) and submit it along with the fee;
- Don’t send your lump sum payment until they tell you exactly when and where to send it;
- The bank will send you a letter that needs to be notarized and returned before your next payment is due; and finally,
- Keep copies of everything!


© 2011 Prism Innovations, Inc. All rights reserved.

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Life Insurance: The Basics

by Richard F. O’Boyle, Jr., LUTCF, MBA

Life insurance policies are contracts between individuals and insurance companies to pay a set dollar amount on the death of the individual covered by the policy. Most people first buy life insurance when they start a family and take on a large expense such as a mortgage since they don’t want to leave their spouse and kids with a stack of bills and only one income. Individuals in later life see the value of life insurance as part of their retirement and estate planning.

Obviously, life insurance proceeds can be used to pay for final expenses such as probate taxes and funeral costs. But life insurance can also provide retirees with additional options. For example, the cash values in permanent life insurance plans can be used to supplement retirement income on a tax-favored basis. A life insurance plan may allow a retiree to elect a more generous pension option, knowing that the life insurance will pay out to their surviving spouse. Finally, having a life insurance plan late in life gives the retiree the comfort in knowing that she can spend down her assets and savings and her children and grandchildren will have a financial legacy.

Types of Life Insurance

Term Life Insurance will pay your beneficiaries a set amount as long as the policy remains in effect, which is generally 5, 10, or 20 years. If you choose a longer term, the premium will be higher, all other things being equal. The rate will increase at these time increments, and ultimately become unaffordable or simple terminate.

Many term plans offer the option of converting to a permanent plan at a future date with no evidence of insurability, that is, no new medical exam. You get to keep the same rating or classification, even if your health has deteriorated, and the length of coverage can be extended.

Permanent Life Insurance, such as Whole Life or Universal Life, has a higher premium, but some money is set aside in a conservatively invested account for the medium- or long-term. The premium on the permanent plan does not increase over time. There are other variants of permanent insurance such as Variable Life (where the money is invested in stock-type accounts) or Return of Premium plans which act a lot like Universal Life plans.

Keep in mind, that once you get life insurance, the rate will increase only by the specified amount (if a term plan) or not at all (if a permanent plan). These rates are locked in even if your health deteriorates over time.

Whole Life Insurance is permanent life insurance designed to last through your life expectancy. The premium remains fixed and level as long as you own the policy. The policy’s cash value grows at a guaranteed rate and may also accumulate dividends.

Universal Life Insurance is permanent life insurance with a flexible premium and a cash value that grows based on current market interest rates. The policy owner may choose to pay higher or lower premiums depending on his own income cycles.

Term Life Insurance is temporary coverage designed to last for a specified time frame – usually five, ten or twenty years. Premiums will increase on a set schedule after the initial term expires. No cash value accumulates, although many plans offer a conversion rider that allows the owner to convert the plan into a permanent policy.

Customizing Your Policy with Life Insurance Riders

Disability Waiver of Premium: If you are unable to work due to illness or injury for six months or more, the insurance company will pay your life insurance premiums. Whole Life plans will continue to accrue all scheduled cash values and dividends; Universal Life plans will generally not accumulate additional cash values, but will remain in force during the period of disability.

Conversion: You can convert your term policy “without evidence of insurability,” e.g., without a medical exam, into one of the permanent plans offered by your insurer. The insured must pay the new premium based on their age at the time of conversion.

Accelerated Death Benefit: You may take up to 80% or 90% of the death benefit while still alive if diagnosed with a terminal illness.

Family and Child Insurance: The spouse and/or dependent children of the primary insured may be covered at a percentage of your death benefit.

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Book Review: "The Big Short: Inside the Doomsday Machine"

by Richard F. O’Boyle, Jr., LUTCF, MBA

In Michael Lewis’ expose of the origins of the 2008-2009 credit meltdown, “The Big Short: Inside the Doomsday Machine,” we see how greed and ignorance created the perfect storm that brought on the worst financial crisis since the Great Depression. As a financial professional who helps families and businesses plan for their retirements, I help implement insurance and planning strategies. When we put in place these plans we are often relying on third party ratings of insurance companies and products to give us the confidence that the plans can be fulfilled.

If anything, the experience of the last three years must give us pause when taking for granted the ratings of companies such as Moody’s and Standard and Poor’s. I’m not saying that we should jettison these ratings altogether – instead we should consider them carefully as a piece of the overall picture of financial strength. These agencies went wrong when they got involved in rating very complex derivative products while relying almost entirely on the data supplied by the companies that created those same products.

Lewis’ account of the development mortgage bonds and the evolution of derivative financial products such as credit default swaps is a readable insider’s view of Wall Street’s money machine. Things went awry when rating agencies gave their stamp of approval on these products for sophisticated investors such as hedge funds and institutions. Shockingly, the creators of these products – Citigroup, Goldman Sachs, Merrill Lynch and other banks – often weren’t so sure of the value of the home loans that were the foundation of the underlying bonds.

The basic problems were that the mortgages that formed the foundation of the bonds after 2005 were increasingly low-quality subprime loans and the rating models of the agencies did not take into account that property values might decline. Furthermore, the banks creating the products tailored their submissions to the agencies so that the credit risks of the underlying bonds were not truly diversified and thus riskier than they appeared. In effect, very risky bonds were given super-safe AAA ratings.

Here’s how the products were constructed and what went wrong:
1. Individual mortgages are lumped together into mortgage bonds. Investors in these asset-backed bonds get paid off as the individual mortgages are paid off.
2. Mortgage bonds are rated for financial stability by rating agencies based on their assumptions about default rates by individual mortgagees. The underlying home values and FICO scores are two key measures that they look at.
3. Investors in the bonds buy insurance called “credit default swaps” against the risk that these mortgage bonds will not pay off as expected (that they will default). The price of this insurance is based on the rating that the mortgage bonds received.
4. Big banks package thousands of these bonds and savvy investors trade in the swaps. Some banks generated so many of the bonds that they couldn’t sell them all right away so they held onto them in their own accounts.
5. When adjustable rate mortgages began to reset in 2007 and 2008, the new higher rates forced many individual mortgagees to default. The cascade effect of high defaults and sinking home values triggered the credit default swap insurance plans.
6. Banks were forced to pay out on the insurance and devalue the bonds held on their own books. Ultimately, the banks were forced to come up with more cash to shore up their finances or go bankrupt.

While I walked away after reading this book with a clearer understanding of how Wall Street works, I’m not sure that this knowledge makes me any more confident with the abilities of the various players. Lesson learned: be careful of the herd mentality in all forms of investing. Even the most sophisticated investors can get into trouble when they get greedy and rely too heavily on someone else to do their own homework.

“The Big Short: Inside the Doomsday Machine” is available from Amazon.com

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The Life Insurance Medical Exam

by Richard F. O’Boyle, MBA, LUTCF

When applying for life insurance, the company bases it’s underwriting decision on a slew of data, including a past medical treatments, personal history, financial profile, motor vehicle record and current medical examination. If you are applying for over $1,000,000 of coverage or if you are over age 60, the medical requirements will be a bit more thorough.

The medical exam usually consists of a series of medical questions, blood pressure and pulse readings, and blood and urine samples. The insurance company will have a nurse collect copies of your medical records from your doctors. Additional tests may be requested, most often an EKG if you have a history of serious heart disease.

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