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Financial Planning and You April 2, 2013

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I’m going to make this very short.
If you follow the strategies that are suggested by the main stream financial planning industry you can expect to have the same results as their clients have had over the last 20 years because they haven’t changed much in their advice.
The results are out their for everyone to see:
Median Net Worth in 2010: $77,300
For the 55-64 age group median net worth was $179,400
Half of American families don’t have a retirement account, for the other half the median amount in it is $44,000. For those in the 55-64 age group the median amount in a retirement account is $100,000. For those in the 80-90% income group, a group that averages $114,000 of family income, the median amount is $88,000.

Now, the financial planning industry blames the American public for not being moral enough to follow their advice about retirement savings. The truth is that the advice given is not working for a variety of reasons from technical to psychological. So if something is not working why do you not change your strategies to something that does work?

Ask yourself if you are ready to explore something different that has proven to work?

What is the best EIUL? January 26, 2009

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I have been asked that question much.  The short answer is “it depends upon what you are trying to accomplish.”

But for my needs, which is helping clients to protect their wealth from the taxman and hedge against inflation I have found what I consider the best equity indexed universal life insurance policy (EIUL).  This is not to say that other companies EIULs are bad, just that I strive to find the best one for my clients and recently I have had a change of opinion as to what is best.

First, the insurance companies make it very difficult to compare policies using just their illustrations because they use different assumptions that you have to adjust for.  The internal workings of these products are made needlessly more complicated, and difficult for complete transparency.  I want to thank  Brett A. Anderson, author of Last Chance Retirement,  for his hard work in getting the information needed for comparisons from the various insurance companies.

I also want to note, as a habit, I illustrate policies for clients conservatively, usually 10-15% below the historic based internal rate of return.  But for this post I am using historic based returns.

Mr. Anderson has published rates of return for different policies using a twenty year look back and a quarterly average for re-set.  This makes the policies comparable.

The product that gives the highest rate of return within that 20 years look back is Minnesota Life at 9.00%. Compare this to the Aviva product (2 year point to point) at 8.11%.   The Minnesota Life product, not surprisingly, has the highest cap rate at 16% for a 1 year point to point.

Correspondence from an actuary at Minnesota Life indicated they structured more of the fees into the life insurance costs instead of the cash value side.  Since we structure policies minimizing the life insurance this keeps the fees down and allows for maximizing cash value.  If you maximized the life insurance then this policy would not perform as well for you as others.  It is these little things that make their product superior for what we are trying to accomplish.  Additionally, Minnesota Life charges their interest on policy loans at the end of the year, while Aviva charges at the beginning.  This slight twist makes a difference in the long term performance of the policy.  Minnesota Life is a A+ rated company indicating good company strength (about the same ratings as Aviva). 

Going forward, until the products change, I will be using Minnesota Life’s EIUL for my clients who are looking to maximize living benefits, minimize taxes and have a source of tax-free income.

What should your wealth building system look like? January 14, 2009

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So far this week I have been talking about the failed retirement system.  Now I am going  to move to what a successful system should look like.

Here are the basic considerations:

1. Creation of wealth producing assets;

2. Minimize taxes, both present and future;

3. Active participation in the plan; and

4. Ability to react to a fast changing world.

Now there are many possible assets that will produce wealth for you from business ownership to real estate to stocks.  They have several things in common.  One they are never guaranteed.  Anytime someone sells you a guarantee in the finance world, you know they are not wealth producing assets.  Two, they require your active participation.  Whether it is managing your investments, or creating a business or buying investment real estate it all requires you to be consistently involved.  You can’t turn over this to someone else and expect to get decent results.  Now, you can find experts to help you, but you have to be wary of these “experts.”  Choose wisely!

Experts on my team include Warren Buffett (nice to have him picking investments for me!), Ed McPherson (real estate development), Bawld Guy (investment real estate),  my accountant, my attorney, my wife, etc.  But I am the person driving  the financial bus!  I am actively involved in all my investments, my business, and my strategies.

If you choose stocks as your medium, you can choose to be a trader or to buy and hold.  Either way you can make good returns, but they require very different mind-sets and time requirements.  Traders, have to do it as a business.  They have to be constantly aware of how each of their stocks are doing.  They must have a trading plan and stick to it no matter what.  To buy and hold requires much more fundamental analysis up front, but then less time after the initial purchase.  They must push off their fears when the market turns against them, remaining focused on the cash flow from the businesses they own stock in and other fundamental components.  They need to forego the idea of diversification for concentration.

Real Estate is a much easier way to go.  The mental work is done up front to come to a price that makes sense.  Real Estate metrics are easy to understand and to figure out.  Expert advice can be found for little money because the seller of a property will pay for it.  But you have to first have a plan.  Then it is just a willingness to look around the country to find properties where the environment and the numbers make sense.  You let leverage and inflation do it’s job, not having to depend upon beating a market.  Price in the cost of management and you can use your time building your real estate portfolio instead of dealing with the renters.

Founding your own business is also easy to accomplish.  But the hard work is in making it profitable.  But if you succeed you can create extreme wealth fast and turn over the day-to-day operations to a manager freeing you to enjoy the cash flow!

Now, not everyone is interested owning their own business although by at least founding one you learn much to help you in the rest of your financial world.  But everyone needs to become an active investor because the alternative has proven to be financially fatal!  So everyone needs a wealth building system.  And everyone should be the driver of their wealth building bus.


Told you so! January 11, 2009

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After a long day of traveling yesterday, we are back in Florida! 🙂  Still recovering from a crazy cold that has lasted since Dec. 30th.

Since I have made this my main claim and call to action for folks, it is finally gratifying that the mass media is starting to see the light!  Read this Wall Street Journal Article and tell me it doesn’t sound like what I have been telling folks for a while, now!  Remember my book launching party is coming up the end of the month.

Yours in wealth creation,

David Shafer/Shafer Financial

The Failure of Financial Planning; What went wrong? January 7, 2009

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By now it is beyond doubt.  Folks following the common advice from the financial planning industry are in trouble.  It is clear that the accumulated wealth for folks approaching retirement is nowhere near the amount needed to retire comfortably.  This despite most families having two incomes.  What went wrong?

I believe there are several area’s of failure.  Most of the models of financial planning over estimated the amount of years folks would have the luxury of saving and investing.  The models assumed an average time of 35 years for this accumulation phase or roughly from age 30 to 65.  But the actual data demonstrates that families really only have 20 years to accumulate.  Rare is the individual who has disposable income in their twenties and thirties that is not dedicated to purchasing a home, building a reserve fund, or starting a family.  This age cohort is too busy trying to establish a career, hold on to a job, or find their way in life to aggressively save.  And now we see folks well into their 40s being laid off from jobs and using any acquired wealth to get to that next job.

When we use twenty years as a accumulation phase it causes all sorts of difficulties.  First, is the obvious less time means dramatically less accumulation.  But beyond that, when we look at the stock market (the favorite  investment suggestion from financial planners) in 20 year intervals we see a very different environment than in 35 year intervals.  For example if you were investing in the S & P 500 Index with no expenses for the last 15 years you would have a total return of around 150%.  So if you had $100,000 invested 15 years ago you would have $250,000 now.  But few people have such a large lump sum sitting there to be invested, so most people do monthly contributions.  If you would have invested monthly for a total of $100,000  over the last 15 years, you would have slightly over $130,000.  How do you get from there to $1M in five years?  Looking at the last 10 years you have a negative return of around 2%.  So if your first half of your savings life were the last 10 years you need huge returns the last half to get anywhere near your goal.

Finally, the fact is most people will miss their goals.  It’s great to set a goal, but the facts remain we are eternal optimist by nature.  So, if your goal was $1M by retirement, you should create a plan that puts you at $1.5M.

Of course, the big issue is the fact that most financial planners put mutual funds or annuities at the center of folks retirement planning, which I have blogged on endlessly.  Combining all these issues lead us to the fact of folks not accumulating anywhere near what they need to retire comfortably.

Ready to listen to some “uncommon” financial advice?  Take a look at your investment statements and answer that question!

Do you have a plan? October 6, 2008

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Dave, I have a plan it just isn’t working!  That is what a reader said to me this weekend.  So I asked a few questions.  What is the plan?  What are your goals?  What rate of return do you need to reach your goals?

The plan is a buy and hold strategy with mutual funds using dollar cost averaging and a 3% company match.

The goal is to retire comfortably.

He guessed around 10% rate of return.

The problem is his “plan” is not a plan but an investment strategy.  This led to an undefined goal and no clue how much of a rate of return he needed.

Let me repeat again, a plan is very different than an investment strategy.  What makes up a plan?

First you have to know exactly where you are now.  Then you have to decide exactly where you want to be and how long you have in order to get there.  Then you can come up with a rate of return on your capital that you need to obtain.  When you have these numbers, and only when you have these numbers, are you ready to start building the plan and deciding on the investment strategy.  Wall Street has taught people to do it backwards.  How can you decide on an investment strategy before you know what you need to accomplish?

If you have an investment strategy without a fully designed plan, your chances of success are slim.  How can you know if you are making appropriate progress without a plan?

The last decade has not been nice to people without a plan.  It certainly has not been nice to people with only an invest in mutual funds investment strategy.  Can you design a plan on your own?  Certainly.  But will you?  Most people will not take the time it takes even when they tell themselves they really need to do it.  Its like losing those extra pounds.  You know you need to do it, but life intervenes and it never gets done (you need a plan for that too!).

Let me be direct with you.  If you haven’t created a plan by now, the chances of you doing it without outside influence is low.  If you don’t have a plan you will probably fail to reach your goals.  I will help you design that plan, get you psychologically attuned to implement the plan, and coach you as your plan is put into practice.  You will reach your goals with my help.  Is this worth $1950?  What is the cost of failure? Contact me now at dave@shaferwealthacademy.com or 727.804.9271!