Financial Abundance Guide

With the stock market in turmoil and interest rates at all time lows, you might be tempted to purchase a deferred annuity. The deferred annuity sales person will tell you about the tax deferred benefits, the guaranteed return if you were to die and may even provide a product that gives you market related returns when the stock market is up, while guaranteeing that you will not have a loss in value during a down market. If this sounds too good to be true, it probably is.

Since the deferred annuity sales person will be paid a commission as high as 10% on your deferred annuity purchase, let’s take a closer look at what he/she is trying to sell you. Here are some areas that are not always well explained by the deferred annuity sales person.

1) Mortality and Expenses (M&E) Charges – All deferred annuities have M&E charges to pay for the life insurance guarantee, the sales person’s commissions and the administrative expenses of the contract. M&E charges are usually between 1% and 2% of the contract value, paid every year. If your deferred annuity has a value of $100,000, up to $2,000 annually will be used for M&E expenses. Even though you will likely never see these charges, they are being taken from your investment each year.

2) Surrender Charges – Virtually all deferred annuities that are sold through commissioned sales people will carry a surrender charge. Typically, these charges begin at 7% for the first year of the contract and decrease by 1% per year. Seven years after you purchase the contract, you may still have to pay 1% of its total value if you want to cash it in. Sometimes, you are allowed to withdraw up to10% of contract value yearly. However, the surrender charges assure that the insurance company will have your money long enough to pay for the high sales commissions required.

3) Management Fees – If you buy a variable annuity, the subaccounts are very similar to mutual funds. A typical subaccount will have a 1% or higher management fee. This expense is over and above the M&E fees that were previously discussed. While these fees are somewhat consistent with the fees charged for actively managed mutual funds, they are up to 5 times as high as the fees charged for indexed mutual funds and Exchange Traded Funds (ETFs). The subaccount returns will be net of the management fees, but they will not show the M&E fees that are assessed each year.

While it is true that a deferred annuity will be tax deferred until you cash it in or annuitize it, all gains of the deferred annuity will be taxed at your ordinary income rate when you receive your returns. Since the deferred annuity is typically held for 10+ years, this tax advantage may completely disappear when you cash it out.

If you believe that a deferred annuity is right for you, before you buy the product that your sales person is offering, contact Schwab, Fidelity, Vanguard or another discount brokerage house. They will likely have a similar deferred annuity product. Compare M&E expenses, surrender charges and management fees of the non-commissioned product with the one you are being sold. You will likely find that the non-commissioned product provides a better total return than the one that you are being sold.

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If you read the Wall Street Journal or watch the financial news, you will likely see stories stating that the Fed is not concerned about inflation, since, as our economy cools, there will be less pressure on the prices of commodities such as oil and food. These articles imply that the recent reduction in oil prices is a good example of why inflation is not a significant concern.

However, from July 2007 to July 2008, the Consumer Price Index (CPI-U) was up 5.6%, the highest in 17 years, oil is 75% higher than it was in 2007 and the dollar is down 10% against the Euro in 2008. From my perspective, the reason that the Fed is ignoring inflation is that, while maintaining a Fed funds rate of 2% and increasing the US dollar money supply, they are willing to trade the risk of high inflation against the risk of collapse of major US financial institutions. These, of course, are the same financial institutions which created the current financial crisis.

I do not have enough data, nor am I wise enough to evaluate the risk of failure of our financial services institutions. I will trust that this data and wisdom resides in the Fed and that they have made a calculated decision to create an inflationary environment in order to minimize the risk of financial institutional failure.  However, regardless of their reasons, the Fed policies are destined to increase inflationary pressures.

In today’s financial environment, there are several reasons why low interest rates are beneficial to financial institutions. Two examples include:

1. Adjustable rate mortgages are often tied to the Fed funds rate. A low Fed funds rate helps keep payments on adjustable rate mortgages low. While in ordinary times this might not be in a bank’s best interest, in today’s mortgage marketplace, maintaining the current 2% Fed funds rate may help decrease the number of mortgage defaults by keeping the adjustable mortgage payments lower

2. Lending institutions typically pay depositors interest that is based on short term interest rates, while the interest they receive on loans is often based on longer term rates. Lending institutions can maximize profits when there is a significant difference, as there is today, between short term interest rates and longer term interest rates.

Unless the Fed radically changes course, the US could repeat the hyper inflation of the 70s. At this point, there is no commitment by the Fed to address their current inflation stimuli. Until this changes, my plan is to remain “invested for inflation.” Our past experience has demonstrated that once inflation is imbedded in our financial systems, it will likely take years before it can be lowered.  Let’s hope that the Fed takes action to correct this situation, before it is too late.

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What is the world’s most expensive white collar crime? If you guessed drug trafficking you would be wrong. It is identity theft!

In 2008, the Federal Trade Commission predicts that 33 percent of all Americans will be the victim of some form of identity theft. When this occurs, it can easily take over 600 hours of your time to restore your identity and, depending upon the type of identity theft, it can become a personal nightmare for years.

You may not be aware that there are five types of identity theft. Most people think of financial identity theft, in which someone uses your credit cards or your bank accounts. However, of all identity theft, financial is only 22% of the total and is the easiest to fix.

The biggest type of identity theft is criminal or character identity theft. This occurs when someone uses your identity in the commission of a crime. When this happens, there may be a warrant out for your arrest that you know nothing about it until the police arrive at your door.

Medical Identity Theft is the fastest growing type. This occurs when someone uses your health insurance as their own. When this occurs, your Medical Information Bureau records can be completely altered. This type of theft can lead to you being declined for insurance coverage or, in an emergency situation, you could be administered the wrong medication or given the wrong type of blood. In some situations, Medical Identity Theft has been fatal.

Social Security is the fourth area for identity theft. This continually occurs as people come to work in the U.S. without a valid Social Security number. In one case, a woman found out that over 80 people were using her Social Security number.

The final area is Driver’s License Identity Theft. When someone has a driver’s license or state id with your information and their photo, they can open bank accounts, purchase vehicles, get speeding tickets and even DUI’s, and you can be held responsible for all of these activities.

Stealing and selling identities is a multi-billion dollar black market. Once an identity is stolen, it can be bought and sold over and over again, with multiple people in multiple locations using the same identities. Since we are all in many different databases, there is no way to prevent your identity from being stolen. You cannot control which data base with your personal information will be breached next.

The best identity theft protection is to have a service that you can rely upon to quickly restore your identity if it has been stolen. The service should include: 1) Monitoring - your accounts should be constantly monitored and you should be notified when accounts open in your name, your address changes or any other changes occur; 2) Restoration – having an experience person who will work on your behalf to restore your identity to its original form is critical; 3) Legal Protection - for emergency situations, the service should provide immediate access to attorneys who will write letters and make phone calls on your behalf.

No one is immune to identity theft. If you would like more information on what you can do to protect yourself and your family, please do not hesitate to call or email me.

This article was written by Peggy Goehringer, a Certified ID Theft and Risk Management Specialist. Peggy can be contacted by phone at 720-280-1068 or by email at peggygoehringer@aol.com

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Disability is a risk that many people underestimate.  While most people have life insurance, health insurance and property/casualty insurance, many people fail to carry adequate disability insurance.  Some people believe that the risk of becoming disabled is so small that they can afford to ignore it.  Others believe that they will get enough through Social Security, if they become disabled.  If you believe either of these to be true, you might want to reconsider.

A U.S. worker, under the age of 65, has a considerably higher risk of being fully disabled for over six months than she does of dying.  Why is it that many more workers have life insurance than have disability insurance?  Can you financially afford the consequences if disability occurs?

Perhaps you are planning to rely on Social Security if you become disabled. The Social Security administration states that “you can receive disability benefits after six months if you have a physical or mental impairment that’s expected to prevent you from doing substantial work for a year or more or result in death.”

However, virtually no one begins collecting Social Security benefits before they have been disabled for at least one year.  Combining the long “lead time” to begin collecting from Social Security benefits, with the relatively low monthly payments, is a recipe for financial disaster.  Just as you are not planning on receiving 100% of your retirement benefits from Social Security, you should not depend on Social Security alone to take care of you if you become disabled.

If your employer does not provide you with long term disability coverage, you should seriously consider buying a personal disability policy.  If you pay for the policy, the disability income will be tax free.  Combining the tax free disability payments with Social Security payments will allow you to buy a policy that covers less than your current total income.

There are many decisions to make with a disability policy such as a “noncancelable” policy in which payments never rise versus a “guaranteed renewable” policy where the insurer may increase premiums over time.  Before buying any disability insurance policy, find a trustworthy insurance agent who will explain the costs and benefits of all of the policy options.  Choose the policy with the coverage amount, benefit period and policy options that meets your current financial requirements.

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