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Annuities Do Not Belong In 401(k) Plans

Here is Why?

By Rick Kahler CFP

Several weeks ago I wrote about the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which will reform various aspects of US retirement laws. The Act was passed by the House in May and is currently stalled in the Senate.

One of the most troubling of the SECURE Act’s 29 provisions is that it will ease regulations to make it easier for financial salespeople to sell annuities to 401(k) plan participants.

This is alarming, as the act creates a safe harbor for annuities inside 401(k) plans. That means companies choosing to offer annuities would be shielded from liability—no matter how terrible an investment the annuity products may be. This provision has great potential for harm.

Annuities seem always to be a hot financial product in the market place. It’s rare when I interview a new client that they don’t have at least one in their portfolio. Often, it’s the only investment they own. Annuities are not hot because consumers are clamoring to buy them, but rather because annuity sales people love to sell them.

While I rarely recommend them, there are some good things about annuities, especially that earnings grow tax deferred until distributed. They can be useful in this regard in special situations—when stripped of their high fees and commissions. Therein lies the problem.

Sales

Most annuities sold by salespeople inherently contain high fees, big commissions, and high penalties to consumers for taking money out early. What that means for the investor is low returns. For those reasons, the negative aspects of annuities far outweigh any good.

Even worse, annuities have no place being owned by an IRA or, as the SECURE Act would allow, a 401(k) plan. Regardless of fees or commissions, no annuity belongs in a retirement plan. One of my top pet peeves as a financial planner is so-called “financial advisors” who sell people fixed and variable annuities for a retirement account. This makes no sense.

An annuity is a tax-deferred container to put investments in, not an investment itself. It’s what investments are inside it that matters. The same is true of  IRAs and 401(k) retirement plans. Since a retirement plan is already a tax-deferred investment container, it makes no sense to put an annuity—another tax-deferred investment container—inside of it. The silliness of this is obvious to even the most casual observer, unless your livelihood comes from selling these products.

Agents and their companies spare no expense in developing convincing storylines, half-truths, and slight-of-hand explanations of why it makes perfect sense for a retirement plan to own an annuity.

The bottom line is that annuities are sold, they are not bought. The only reason annuities are purchased in someone’s retirement account is because the salesperson receives a much higher commission from the transaction than selling a mutual fund, individual stocks, or CDs.

Why?

So why did our Representatives vote 417-3 to open up investors’ 401(k) plans to these high-cost, high-commissioned, financially disastrous products? I can only surmise that most of them didn’t fully understand what they were voting on and that the insurance lobby did their normal amazing job of selling the alleged benefits of annuities. Oh, and maybe there was a campaign contribution or two.

Assessment

Most annuities are expensive investment vehicles that benefit the salesperson and the company far more than they benefit you. If you are thinking of buying one, or in the future your 401(k) offers the option of buying an annuity, do some digging before you sign on the dotted line. Make sure you get advice first from someone other than the annuity salesperson—someone with no vested interest in selling you this product.

Your thoughts are appreciated.

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On Prioriting Money Beliefs

“Money is supposed to be spent!” “Money is supposed to be saved!”

By Rick Kahler CFP®

We may not hear talk-show participants shouting these opposing views at each other with the same level of anger that characterizes some of our political rhetoric. Yet the core polarization that pervades so much of today’s society also shows up in people’s beliefs about money.

I saw this polarization recently in a conversation with a group of friends in Europe. The topic of money came up, as it usually does when people find out one of my specialties as a financial advisor is financial therapy. The thinking of my friends was that money is meant to be spent, not saved. They felt that people who saved money were faithless and greedy hoarders who by their saving threatened the economic system.

At the other extreme, I know other people who strongly believe a person’s first duty is to save and invest. According to them, those who don’t save as much as possible for emergencies and retirement are foolish, deluded, irresponsible, and destined to live out their last days in poverty.

My friends who embrace the money script that “money is to be spent, not saved” are likely to also hold a money script that “the universe will provide.” They tend to fall into a category we label Money Avoiders. Those who embrace the money scripts that “money is to be saved and not spent,” who also believe “one can never really have enough money,” are in the category of Money Worshipers.

Like most other forms of polarized thinking, neither of these extremes is right. Nor is either belief wrong.

Money does need to be spent. The health of our economic system depends on transactions. It’s important that money flows through the selling and buying of goods and services. When a significant number of consumers stop spending, economic activity grinds to a halt. We saw the effect of this in the financial crises of 2008. It’s also important to spend money to take care of ourselves and our families. Saving or investing money to a point that we go without adequate food, shelter, health care, or similar necessities is not healthy.

 ***

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Money also needs to be saved to provide a cushion against emergencies and to provide for our needs in retirement. My European friends enjoy a higher certainty of adequate income in retirement. For them, this is the universe providing, a strong government security net. However, those that live in many Asian countries are assured very little, if anything, in the way of retirement income. For them, the universe comes up short and depends upon the generosity of family to provide. Saving in an Asian culture is therefore much more important than if you live in a Scandinavian country.

Saving and investing for retirement is important for those of us in the US, as well. Without it, we face two dubious prospects: we can depend on family to provide or we can eke out a meager living on a Social Security payment of around $2,000 a month in retirement.

Those who are not polarized around money understand that both spending and saving are important for financial health. They can balance their spending and saving, applying both when necessary in their own lives.

Assessment

Ideally, from this balanced middle ground, someone can also see past the limitations of others who are polarized. Those who believe “Money is meant to be spent” or “Money is meant to be saved” have a world view that results in such an extreme position. Labeling them as “wrong” is not a useful way to try to shift anyone’s polarized beliefs.

Conclusion: Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Financial Stress in Times of Transition

Financial Stress Adaptation

By Rick Kahler CFP®

Stress is what happens when something you care about is at stake. This definition comes from Susan Bradley, CFP, author of Sudden Money and a specialist in the financial aspect of life transitions.

The stress around these transitions is a common reason that people seek out financial advice. We tend to be driven to consult advisors as a result of stressful changes in our lives, such as a divorce, a sudden money event like an inheritance or insurance settlement, an investment or job loss, retirement, or the death of a loved one.

While all these life events certainly have financial components, it’s almost always the emotional components of the change—how we respond to them—that are the cause of the stress.

Any change includes three stages: an ending, a period of passage while we relate and adapt to the change, and a new beginning. This period of transition can be fraught with emotion and behaviors that can trip us up in many ways, including financially.

Susan identifies nine such emotions and behaviors that she sees commonly in people in transition.

1. Lack of identity. If the transition results in the loss of a familiar role—spouse or employee, for example—you may struggle with “Who am I now? “There is often confusion and ambivalence about the future, and an inability to make decisions.

2. Confusion/Overwhelm/Fog. There is a sense of defeat by everything. You may physically slump, have a glazed-over look, and ask others to repeat a lot. It’s hard to understand, be present, respond, focus, or move forward.

3. Hopelessness. You may have a sense of having given up, not being in control of your fate, or being a victim. It may seem that there is nothing you can do to change yourself or the outcome. Financial decision-making is very difficult.

4. Invincibility. This can happen with a big positive change in your finances. You may think everything is going to turn out fine. You may feel euphoric, confident, and smarter than your advisors. You may spend more and take greater investment risks.

5. Mental and Physical Fatigue. Change can be exhausting, and the exhaustion can go undetected by others and even yourself. You may have difficulty following an agenda and tasks.

6. Numb/Withdrawn. You may feel ambivalent about and indifferent to exploring the changes in your life, what you want, and what the future may hold. You don’t give much feedback and are withdrawn and non-expressive. You may miss or not return phone calls or emails. The planning process often comes to a standstill.

7. Narrow or Fractured Focus. You may either be preoccupied with one area that excludes everything else or have an inability to focus on anything. In either case, focusing on what’s important becomes difficult or impossible.

8. Inconsistent Behavior. This is the inability to hold to one position. Instead, you may change your mind repeatedly or switch between opposite positions. You are uncertain and often embrace opposites in your wants and desires in the same breath. Making decisions become impossible.

9. Combative. You may hold on to feelings of anger, resentment, victimization, and rage regardless of the facts. You are outwardly emotionally expressive and challenging. You don’t respond well to logic and practicality. A combative person doesn’t have problems making decisions, but does have difficulty making good decisions that are in their best interests.

Assessment

Emotions and behaviors like these are generally temporary. Financial decisions made in the midst of transition-based stress, though, can have lasting negative consequences. The support of trustworthy advisors can be invaluable in navigating through both painful and joyful life changes.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Medicare for All?

Taxes for All?

[By Rick Kakler CFP®]

As the recent debates among the Democratic presidential candidates emphasized, the idea of government-managed health care is gaining popularity. “Medicare for all” or some form of “free” universal health care is certainly an appealing idea. Who among us wouldn’t appreciate someone else paying our medical bills?

I certainly would. My family’s personal health care costs, including premiums and out-of-pocket expenses, run just over $3,000 a month. If my health care were free, I could find a lot of uses for the savings.

But my skeptical side, and probably yours as well, knows that there is no such thing as a free medical procedure. Someone, by some means, has to pay for insurance coverage, doctor visits, hospitalizations, and other medical costs.

The tax tab for providing “Medicare for all,” as envisioned by Sen. Bernie Sanders, is $3 trillion a year, according to several analysts. Currently, the cost for Medicare is about one-sixth that amount, or $583 billion a year.

Sanders and other presidential candidates tell us the wealthy will pay this tab. The reality is that when we look at other countries that have similar universal health care plans, it isn’t just the wealthy that are paying for it.

Raising the more than $3 trillion needed annually to fund “Medicare for all” would require doubling all personal and corporate income taxes or tripling payroll taxes. This analysis comes from Marc Goldwein, a senior vice president at the non-partisan Committee for a Responsible Federal Budget. He was cited in a May 9, 2019, Bloomberg article by Laura Davison, “Tax hikes on wealthy alone can’t pay for Medicare for all plan.” “There is a lot of money out there, but there isn’t $30 trillion [over 10 years] sitting around from high earners,” Goldwein said. “It just doesn’t exist.”

I did a little investigating of the tax rates of European countries that have universal health care and found Goldwein’s statement to be true. For example, Denmark taxes income over $7,000, with rates starting at 40%. The US rate starts at 10%. This would indicate a doubling or tripling of income taxes or payroll taxes on the lowest earners is not a politically-skewed scare tactic, but an economic reality.

The top rate in Denmark is 56%, while the top rate in the US is 50% (37% federal and 13% state). This is just one of many examples I found in my searching that strongly indicate other countries that have universal health care haven’t found much room left to tax the wealthy. Based on their experience, the majority of the cost will need to come from lower income earners.

Sadly, this message is not being disseminated to voters by proponents of universal health care. While I am not advocating for or against universal health care here, I am advocating for full disclosure and transparency.

A topic as significant as this deserves a great deal of discussion based on clear, complete disclosure of facts and educated analysis. It requires the best available answers to questions like who will be covered, what will be covered, how much the program will cost, and who will pay for it.

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Assessment

Raising six times what we are currently spending for Medicare would be a huge task. Transferring one-eighth of the US economy from the private sector pocket to the public sector one would not be easy or painless. Making the transition to some form of tax-funded universal health care would be a major shift in direction for this country that would have a significant impact on all Americans. It is not a decision to make based on inadequate information, political rhetoric, or unreasonably optimistic assumptions.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Foreword Dr. Krieger MD MBA]

 Foreword by Jason Dyken MD MBA

Book of Month

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Why Your Financial Planner May be Replaced

 By a Computer

[By Rick Kahkler CFP®]

If Ken Fisher is right, in the future you will be talking to a computer about your asset allocation and loving every minute of it.

Fisher has built Fisher Asset Management into the largest fee-only investment advisory firm in the US, with over $100 billion under management. Speaking at the Investment News Innovation Summit in New York City on April 17, 2019, he said, “We need to get machines talking to people in a way that is more human than human.”

If you view “talking to machines” mostly in terms of using four-letter words when your computer locks up, you might be skeptical.

Fisher explained there are six personality profiles that fit almost every investor. “When you (or a machine) knows what they are, then you deal with them according to their profile.” In Ken’s thinking, machines will be able to spot the profile and then, using an algorithm free of human error, interact with the customer in a manner superior to a human advisor. He sees this happening within the next ten years.

I asked him, “What happens to the human advisors when machines talk to your customers better than a human?” Ken replied, “I don’t know the answer to that question,” suggesting that people will need to gain new skills and move on to the next thing. “You can’t keep doing the same thing you were before or you will be out of luck.”

As shocking as this idea is to investment advisors, it’s not at all far-fetched. In an “Axios AM Deep Dive” article on April 6, 2019, Mike Allen quoted Axios Future Editor Steve LeVine as saying that Millennials (those born between 1981 and 1996) will be the first generation to fully face the new age of automation, which could wipe out jobs faster than the economy creates new ones.

Like most before them, many Millennials have taken entry level, minimum wage jobs. Allen suggests that, unlike prior generations, they may not find much of a ladder up from there. Part of that is because of the aftermath of the great recession and part is because technology and globalization have reduced middle-wage jobs.

The median income of younger Millennials is $21,000, according to the AXIOS article. Contrast that to the median wage of $84,000 for statisticians and financial analysts, both of which have high concentrations of older Millennials.

It’s those $84,000 a year jobs that Fisher thinks will be done better by machines. If this happens, it will disrupt the financial services industry in spectacular fashion.

Danielle Fava of TD Ameritrade didn’t agree that human investment advisors will become obsolete in ten years. She does see voice digital assistants making email obsolete. She also believes that artificial intelligence will “enhance the conversations advisors are having with their clients,” rather than replace the human advisor.

***

robo

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While staring my professional demise in the face in ten years, I drew solace from knowing I am nearing the end of my career. Another fact that should comfort some financial professionals is the difference between investment advisors and analysts (like those who work for Ken Fisher) and financial planners. Investment advising is relatively easy; that’s why a machine may be able to do it all in ten years. Also, investment advice comprises only a small fraction of what financial planners do. It will take a really, really smart machine to integrate all the complex aspects of someone’s financial picture into a sensible plan.

Assessment

So maybe ten years from now a machine will flawlessly figure out your asset allocation. But it may be another ten years before your financial planner is a machine, and maybe another 50 before a machine can do financial therapy.

Conclusion

Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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The “Good Deal Exemption” for Financial Advisors is No Joke

The “Rules”

[By Rick Kahler CFP®]

In the business of selling financial products, the “good deal exemption” may be one of the most widely used “rules” most people have never heard of. You can’t find it in any rule book or statute. Even Google has never heard of it. Yet it is used on a daily basis.

The rules and laws surrounding the sale of financial products are complex and voluminous. Even with the best of intentions, it isn’t hard to run afoul of a rule.

Under the good deal exemption, however, a licensee can violate any rule or statute as long as the investment sold to the customer turns out to be a “good deal.” This is a tongue-in-cheek way of saying you can violate any rule you want as long as the customer doesn’t file a complaint or sue you. Which they will rarely do if the deal turns out to make them loads of money.

It’s when investments go bad that customers often complain or sue, not because they were aware of any securities violations, but because they lost money. It’s the ensuing investigation by the regulating body and the customer’s attorney that uncovers any violations.

Example:

Recently, I came across a perfect example of the good deal exemption. A married couple I knew, Arnie and Audrey, invested with Bernie (not his real name) 30 years ago as they neared retirement. He put their entire savings of about $310,000 into mutual funds that invested in common stocks. Because of a pension and Social Security, they didn’t need any income from their investments.

At the same time, Arnie put his investments into a revocable living trust, naming Audrey as the trustee and beneficiary. Eleven years later, when Audrey was 80, Arnie died.

Losing her husband’s pension income and one Social Security check, Audrey needed to start drawing $2,000 a month from the portfolio. While most advisors would have recommended reducing the risk and volatility of the portfolio by investing less in stocks and more in bonds, Bernie kept Audrey invested 100% in stocks. This is aggressive for any 80-year-old needing income from a portfolio. He made no changes as the years went by.

At 85, Audrey started showing signs of dementia. Bernie rightly suggested appointing someone other than herself as trustee. But rather than naming one of her three children (who didn’t trust Bernie and may have transferred the accounts), he convinced her to appoint his wife, who also worked in his office, as trustee. In any broker’s books, this was a serious ethics violation.

In the great recession of 2008-2009, when Audrey was 89, her portfolio lost just under half of its value, falling from $832,507 to $478,820. Had Bernie reallocated the portfolio before the crash to a mix of 50% stocks and 50% bonds, the loss would have been cut in half. To his credit, Bernie told her to stay the course and not sell out.

Recently, at age 99, Audrey died. Her account had done phenomenally well, being 100% invested in US stocks, which for the last 10 years was the best investment class on the planet. Her $478,820 had grown to $1,300,000, providing her a $2000 monthly income and a substantial estate that she left to her children.

Assessment

Despite the inappropriately risky investments and the ethics violations, Bernie and his wife are probably protected by the good deal exemption. Given their substantial inheritance, Audrey’s children are unlikely to sue.

This happy ending was due primarily to luck. Audrey lived long enough and at the right time so her portfolio recovered. However, if luck were a sound investment strategy, Las Vegas would be full of millionaires happily retired on their winnings.

Conclusion

Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On the Unintended Consequences of High Taxes on the Rich

On the two types of tax increases

[By Rick Kahler CFP®]

Two types of tax increases are being promoted by several presidential candidates and members of Congress. The less common idea, which I wrote about recently, is a wealth tax on net worth. The more common proposal is a significant increase in income taxes.

Presidential candidate Bernie Sanders favors a progressive income tax that tops out at 54.2% on incomes over $10 million. Not to be outdone, Congresswoman Alexandria Ocasio-Cortez supports increasing the income tax on the same group to 70%.

If you think these proposals are so radical that only the most liberal of voters would support them, a poll conducted by Hill-HarrisX in January 2019 found that 59% of all voters favored a 70% tax bracket. The survey asked 1001 registered voters if they favored a 70% top rate for “the 10 millionth dollar and beyond for individuals making $10 million a year or more in reportable income.” While predictably most Democrats polled—71%—favored the steep increase, 60% of Independents and 45% of Republicans also supported it.

When you consider how popular the notion of a 70% top income bracket is, it isn’t a stretch by any means to imagine these same voters in the 2020 election giving control of Congress and the Presidency to politicians favorable to hiking taxes. The chance of seeing such massive increases on the wealthy goes from a remote possibility to a real probability.

Promoters of the anticipated windfall revenues from such a tax want to redistribute the proceeds to fund things like free college education, affordable health care for all, high speed rail trains, and converting existing buildings to comply with “green” regulations.

While all these outcomes are well intended, perhaps even desirous, before we forge ahead it may be a good idea to consider unforeseen consequences. Let’s look at how past attempts to fund massive government benefits by raising taxes on the rich have worked.

France

In 2012 France raised the top tax bracket to 75% on individuals earning over $1 million. French economist Thomas Piketty, who really wanted to see the tax at 80%, was so exuberant about the move that he predicted many other countries would follow suit.

Government officials estimated that tax revenues would soar to 30 billion euros in 2013. They were roughly half right: revenues came in at 16 billion euros. One of the reasons the tax revenue windfall didn’t develop was a consequence that politicians had not considered. The wealthy packed their bags and moved, taking their investments and income with them.

By 2015, around 2.5 million French citizens lived in the U.K., Belgium, Singapore, and other countries that had much more competitive tax rates. The French economy ground to a halt, growth stagnated, and unemployment soared to 10%. In 2015 France repealed the ill-fated tax.

England

According to The Times of London in March 2019, one-third of British billionaires have left the country because of high taxes, most in the last ten years.

Maryland

The state of Maryland has had a similar experience due to high state and municipal taxes. In October 2013, the Maryland Public Policy Institute reported on throngs of wealthy retirees  “moving out of Maryland to save money on taxes and leave more to their children. This is costing the state millions in tax revenue.”

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Assessment

If the U.S. enacts a similar tax, it is foolish to assume the outcome will be any different. A plethora of other countries with great amenities and competitive tax rates will appeal to those affected by the tax. Tax policies that regard the wealthy primarily as sources of revenue rather than investors in their communities do little to keep those citizens anchored at home.

And so, your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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