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CONTENTS
Foreword By Bob Eubanks. v. Preface The Myth of the American Dream vii. Introduction Why Financial Security And Peace Of Mind Are Attained By Only Few Americans .. xi.

Chapter 1 People Dont Plan To Fail, They Simply Fail To Plan 1 Chapter 2 The Lost Secret Of Planning..

Chapter 3 Six Ways To Lose Or Run Out Of Your Money 11 Chapter 4 The Truth About Inflation Numbers Dont Lie Chapter 5 What The IRS Doesnt Want You To Know! .................................................................. Chapter 6 First Things First: How To Know Where You Are Today ..

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Chapter 7 Goal Setting Made Easy: How To Set Goals That Can Be Reached! Chapter 8 How Much Money Do You Need To Retire So You Never Outlive Your Money? .. Chapter 9 The Biggest Mistakes Retirees Make And How To Avoid Them . Chapter 10 How To Protect Your Assets From Being Taken Away If You Or A Loved One Needs Long-Term Medical Care . Chapter 11 How To Protect Your Assets And Your Family When You Pass Away! . Chapter 12 How To Protect Your Assets From Being Taken Away If You Get Sued! .. Chapter 13 Investment Made Easy (How To Make The Right Choices Without Any Hype) Chapter 14 The Truth About Insurance .

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Chapter 15 Putting It All Together: Getting Your Plan Started Today . Chapter 16 How To Choose A Team Of Advisors Who Will Work For YOU! .. Chapter 17 How To Deal With Your Family And Involve Your Heirs When Planning Your Finances .. Chapter 18 Some Predictions

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Conclusion How You Can Simply And Quickly End Your Money Worries Through Careful Planning 206

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 2007 Retirement Planners, LLC Notices: Due to the fact that the financial landscape changes so swiftly, some examples you see in this book regarding issues that include, but are not limited to: interest rates, prices, inflation rates, rates of return, tax rates, and so on may be different than the current conditions as of the date you are reading this book. Any numbers or figures used in the examples are merely used to be illustrative in nature, and are not intended to be relied upon for your financial situation. ALL RIGHTS ARE RESERVED. No part of this book may be reproduced or transmitted for resale or for use by any party. All reproduction or transmission, in any form or by any means, electronic or mechanical, including photocopying, recording or by any informational storage or retrieval system, is prohibited without express written permission from the publisher. Any slights of people or organizations are unintentional. Published by: Agent Full Name While all attempts have been made to verify information provided in this book, neither the Authors or the Publisher assumes any responsibility for errors, inaccuracies or omissions, nor for any actions taken by readers regarding their financial, tax, legal, accounting or any related situation. If advice concerning financial, tax, legal, accounting or any related matters is needed, the services of a qualified professional should be sought. This book is not intended for use as a source of financial, tax, legal, accounting or any related advice. Any references to any persons or businesses, whether living or dead, existing or defunct, is purely coincidental.

Foreword

BY BOB EUBANKS, 3 TIME EMMY AWARD WINNING HOST OF THE NEWLYWED GAME.
Hi, Im Bob Eubanks. If youre like me as youve gotten older, you probably have had concerns about the years to come. You may be thinking about whether or not you will have enough money to last you during your retirement years. Or, what if tragedy strikes and you or your spouse need to stay at a long term care facility? How will you afford it? Or worse yet, how would you survive, financially speaking, if your spouse died? These are just a few of the many obstacles you may face that have the potential to wipe out your nest egg. However, with a little planning and a better understanding of the rules of the game, your retirement years could be golden. As Benjamin Franklin once said about getting rid of your worries, An ounce of prevention is worth a pound of cure. This book has been thoughtfully crafted to give guidance and share wisdom for the pure benefit of retirees and people planning for retirement. While reading this book, you will be shocked to realize that there are many financial pitfalls that exist in the world of retirement today. Some snafus are government imposed while others may come from negligence or mistakes from trusted advisors. But regardless, this book shines the light on some of the dangers that lurk in the dark, giving you the tools and knowledge to make the proper plans to protect yourself and your family. It is written in plain English so you dont have to be a lawyer to understand it. The stories and examples throughout the book leave you with a clear understanding of what can go wrong and how you can avoid some of these mistakes. The Risky Business Of Retirement! In 1964, I borrowed $25,000 on my house in order to bring The Beatles to the Hollywood Bowl Concert (their first West Coast Performance). Back then that

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was a HUGE amount of money. But, that was an investment that really paid off for me. It was the beginning of a 20-year concert promotion career that included The Beatles, The Rolling Stones, Barry Manilow, Elton John and Bob Dylan, just to name a few. Plus, I even have to attribute landing the position as host of the Newlywed Game to this bold beginning. In those days, taking big risks was scary, however, I knew even if I lost everything and had to start over I still had my youth. But as we get older and wiser, we tend to be more worried about money and our health. There are so many financial pitfalls that can spoil your retirement and potentially send you to the poor house! As you read this book you will have a better idea of where you are financially. And, if you are not where you want to be, you will have discovered many options to get you there. So grab yourself a cup of coffee or tea and find a cozy spot to start your journey. Happy Reading. Sincerely, Bob Eubanks

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Preface

THE MYTH OF THE AMERICAN DREAM

Let me begin by asking you a question. Do you remember the first time you rode a bike? Drove a car? Played a piano? Or, used a computer? How well did you do? Did you make any mistakes? I bet you didnt do it picture-perfect, did you? Why? Because were all used to making mistakes and getting better over time in a typical learning curve. Were even encouraged to try and try again, practice makes perfect. Theres nothing wrong with this, with one exception, your retirement. Many of those decisions are difficult, if not impossible to change. What do you think the IRS would say if you came back to them a year after retiring and stammered, remember that distribution I received last year? Well, sir, I took a lump sum and paid all the taxes, but now I think it would have been better to roll it over. Can you give me the money back? I promise to roll it over. After they picked themselves off the floor laughing, I think you get what the answer would be. Or, how about this one: Mr. Benefits-person, the man down the hall told me what he did and what box to check on the distribution form. Well, when I got my check, you company guys withheld 20% for the IRS, and now I find out theres a 10% penalty, plus 40% in regular taxes. Heres the money back, would you mind if we started over? I promise not to talk to the guy down the hall and get help from a competent professional. Want to take a guess at the answer? My point is this: Whether youre retired or planning for retirement, have tax, investment, or estate planning concerns, its best not to learn from your firsttime mistakes, but from someone elses. After all, when before this did you retire? This is the first time, right? A competent financial professional has retired many times with his clients. It is truly a jungle out there. We are not going to be revealing any new information to you when we tell you that managing all phases of your life in retirement is quite a challenge.

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All the old ideas and methods that used to work, which used to be standards you could count on have either disappeared, or been diminished to the point where they hardly exist at all! Remember when a pension and Social Security were enough to make you sleep well at night? People who are retired today, or are going to be retiring soon, remember life as it was in the post-World War II era. A time when the American dream of building a nest egg through hard work and perseverance, raising a family and getting them independent, putting kids through college, getting our houses paid for or mostly paid for, and retiring on a nice steady income from our pension or Social Security and interest from our savings was realistic and common. Now, all that is a thing of the past. All the things we used to know are illusions to us now. The American Dream, as we knew it for several decades, is nothing more than a figment of our memories, an ancient relic no more modern than a Model T car or a Roman chariot. Todays crazy environment calls for a whole new way of thinking and a whole new way of doing things. It requires a new set of skills and knowledge that most of us have never learned, and that most financial professionals will never tell you. Why wont they tell you? The reality is that most financial professionals are still living in the past themselves relying on old-school, out-of-date methods and information that simply doesnt work in todays society. Most financial companies, large or small, still train their sales people with methods and information that were literally developed as long as 50 to 100 years ago. Most accountants and attorneys are so busy dealing with changes in the law (which is very important) that they dont have time to understand the entire picture of your overall financial situation, and how those laws affect your overall financial situation. Issues like the insane, roller-coaster called the stock market, low interest rates on savings accounts and CDs, the sick corporate executives and accountants who defraud the public, destroying their companies and shareholders, investment bubbles like the dot.com craze that wiped out

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peoples lifes savings, the falling value of our U.S. dollar, trade wars with other countries, that raise the price of all goods coming from Asia; a health care system thats completely out of control; expenses going up and up and up; income taxes increasing steadily as the years go by; the government threatening to and actually cutting back on benefits to seniors, and more! All these things have taken the so-called American Dream, and for some people, have turned it into the American Nightmare. Being a retiree in todays world is a lot different from what it used to be. And, as much as things have changed in the last few years, consider the fact that those changes will be increasing at an even faster rate, and everything we talk about now will be outdated in a few years. The world is truly a global community, and changes that occur in places like Iraq and North Korea have as much effect on our lives as changes that occur in the town where you live. As we go through this book, we will give you some of the tools and information necessary to cope with those changes. We will teach you whats important and not important. Well teach you what you need to know and what you dont need to know. Well teach you the truth about lots of things that other people dont want you to find out. Well use case studies from our files (with the names changed) so you can understand our points better through the form of stories and examples. We know that stories and examples are much more enjoyable and meaningful than boring financial explanations! We may ruffle some feathers, but thats not our concern. Our concern is helping you and making sure you have the best shot possible at living a comfortable, peaceful, secure retirement and your finances are handled in the best ways possible. We dont want you thinking that this is in any way a negative commentary on our society or that were being pessimistic. In fact, the opposite is true. We are very optimistic. We believe that with all these changes and crisis, there is opportunity.

For those who know how to take advantage of the opportunities presented; for those who know what to do and what not to do; for those who are ready to cope with changes; they may find this era ahead of us, the 21st Century, will be the best years for you! The choice is really up to you. You can sit back and let things happen to you or you can take an active role and plan for your future so you can have the best retirement you can possibly have. As we move through this book, we will be giving you lots of information. We hope you will take advantage of it, and not merely read it, set it aside, and continue what youre doing. Remember, if your financial situation isnt working all that well right now, or youre afraid its going to get into trouble and you do nothing, it will progress from bad to worse. Procrastination is one of the biggest enemies of financial success! Taking action is the most important thing. We hope this book will be the catalyst and the incentive to take that action. And remember: Doing what youve always done will get you what youve always gotten! Or, the definition of insanity is doing what youve always done, and expecting different results! These new times require new ACTIONS! Sit back and relax as we move into helping you have a peaceful and secure retirement! Note: Some of the stories included as examples are from the combined experience of the authors and editors. Select information has been written in such a way to protect the identity of the parties involved.

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INTRODUCTION

WHY ONLY A FEW AMERICANS HAVE ATTAINED FINANCIAL SECURITY AND PEACE OF MIND

Our definition of financial independence is pretty simple. It means: that you can basically do what you want and not worry about the money! Thats a vague, general definition but, in fact, thats a pretty good definition. For example, if youre able to live on a $3,500 per month income in todays dollars, pay your taxes and bills, and do the things with your life that you want to do, whether it be vacations, playing golf, hobbies, visiting your kids and grandkids, then we would define you as being financially independent. There are lots of problems and issues you face every day, which well talk about throughout this book that can jeopardize your financial independence. For example, if youre living on an income that meets your needs now, and you just retiredyou wont have the same situation facing you 5, 10, and 15 years down the road because of inflation and taxes. We will explain that in more detail later in the book. Well also talk about the startling fact that a top quality, private nursing home cost $250 a month in 1964, and now costs $4,000 - $6,000 a month! Which is an average of better than 20 times more expensive 42 years later!! This translates to an annual inflation rate on nursing homes of about 7.5% per year! Well talk about what that fact, and others like it, might mean to you later in the book. For now, talking about this concept of financial independence, you have to realize that being rich means a lot of different things to a lot of different people.

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For instance, the family we just talked about that can live on $3,500 a month and feel rich because they can do what they want to do and are financially independent, might seem like a paupers life to another family. On the other hand, some people who hear of the retiree with $3,500 a month might think that person is extremely rich because they only receive $800 a month of pension and Social Security income. The family that is used to living on $20,000 a month before retirement would find the thought of living on $3,500 a month unbearable because of their lifestyle, and their psychological make-up. Its all relative. There are no rights, no wrongs. It all depends on you, your personality, your lifestyle, your goals and how you want to live your life. With all that said, lets get back to why so very few Americans achieve financial independence, and have the true financial security that allows them to do what they want to do. From our perspective, and from years of working with all the clients we have, particularly in the retirement category, it is our opinion that the single biggest problem and the Number One cause of people not achieving their financial goals is people havent done the proper planning for their financial future!!! We think the whole problem stems from the educational system we have in this country, even though many of you may not have been in school for a number of years. Our educational system is based on teaching people subjects, many of which are irrelevant. Many of you may have been taught Latin, for example, or trigonometry, certain versions of American History, etc. But when and where did anyone teach us how to take care of ourselves and plan for our financial future? Who taught us how to deal with the real financial issues that face us today? We have spent a lot of time getting an education, and to this day, other than what we have learned on our own to become a professional in the financial field, there is no education given at any level about how to plan for your financial future. It doesnt matter if youre a blue collar worker, a business owner, a top corporate executiveor anything in between, we are not taught how to take care of ourselves financially.

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We are not taught how to plan for taxes and inflation. We are not taught about how to figure out what we need to do to make our goals become possible. We are not taught about how to deal with the reality of paying mortgages, bills, tax problems, wildly fluctuation stock and bond markets, cash flows, budgeting, insurance, long-term care, health care costs, and on and on and on. Nobody teaches this anywhere in our school systems. We dont care if its high school, college or advanced degree programs, you are not taught about these critical areas. Even students currently in business classes are not getting this kind of information. The bottom line is this: Youve got to plan your financial situation as carefully, and with as much attention and energy as you would plan a vacation! We think everyone would agree that planning a vacation, while fun and entertaining, is not as critical as planning your financial future. For example, when you go on vacation, you know where your destination is, where youre leaving from, and usually youve explored alternative ways to get there, and then you figure out what choices youre going to make based on those options. If you follow your plan, your vacation will almost assuredly come off smooth and successful. Are you doing the same thing with your money? Are you taking stock of where you are today? Are you taking a look at what goals you really want? Are you developing different strategies and options that might help you get there and then picking the ones that work best for you? Are you constantly monitoring and updating your planning processes for the changing tax laws, investment markets and government regulations? Are you working on this with the same energy and vigor that you do for planning a vacation? We think most people dont plan like this, and thats why most people dont achieve financial independence. In our opinion, its really not all that complicated from a theoretical standpoint. The details, of course, can become very complicated. And well move through them as we go through the book and review lots of examples for you.

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The primary and most important thing to understand is that youve got to plan for your financial future. If youre entering retirement now or soon, or if youre just starting out, it doesnt matter. The best time is RIGHT NOW! Not tomorrow, not next week, not after the kids visit, not when your CDs mature, not when youre a year older, not when your mortgage is paid off, not when the elections are overor whatever. The best time is RIGHT NOW! Well give you all kinds of information, tips and techniques on how to help you plan and what you should be aware of. Keep in mind this is not a do-it-yourself book, but it is designed to help you when you work with financial professionals. So youll have the proper knowledge to know what questions to ask so you can make educated decisions. Right now, we want to set the stage for this book by making sure that you understand that to be in the group of the few Americans who are truly financially independent (and if you are there already, in order to stay there) you do need to plan, and do everything you can to make sure your planning is done properly. The best planning will allow you to have: knowledge of where you are today; knowledge of where you want to go; knowledge of the choices, options and alternatives that are available to you, how they work, and the pros and cons of all those choices; then you can make educated decisions on which options and choices you are going to take from a planned professional approach as opposed to a helterskelter, random, wild, uncontrolled, chaotic, environment where decisions are made based on intuition, luck, advice from your brother-in-law, magazine articles, watching the Today show, watching CNBC, etc. Where everything is done from a shooting-from-the-hip, no-plan, no-understanding of the integration and how all the financial areas tie together approach! All that input is good, but it is only a very small part of the real story. The real trick is to understand all your options, do the planning, and then make your educated decisions. If we impart nothing else to you from this book, we hope you will understand this very true saying, People dont plan to fail, they just fail to plan!

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As a final note, let us just briefly outline the areas that are tied together, and should be coordinated so that you will be aware of what you need to look at. These are the areas that need to be addressed so your whole plan fits together and so that what you do in one area doesnt inadvertently cause problems in another area! Those areas are:

Cash Flow/Budgeting Income Tax Planning Estate Planning Asset Protection (Protecting your money and estate from being lost in a lawsuit or being taken by other nasty creditors or Medicaid, etc.) Retirement Planning Tax Planning Investment Planning Insurance/Risk Management Planning Education Funding (If applicable) Business Planning (If you either have or want to start a business)

As you can see, there are a lot of areas tied together in your financial life and it is really impossible to do the best jobwithout making sure each area has been evaluated, understood, and comprehended, then building a plan with all of them considered. So what you do in one area is complementary and beneficial to all the other areas. This message is not one you will learn anywhere else. Most accountants, financial advisors, etc. do not understand how this works. Most people are more than happy to sell you financial products or financial services in a vacuum. The tax preparers give you advice on your taxes. The investment advisor or stock brokers will give you advice on investing, and the insurance person will give you advice on insurance, and on and on. Everything being done independently without coordination and integration. Each area looked upon only by itself and not how it fits into the whole pie. All the ingredients must be worked on together if you want the pie to come out tasteful, peaceful and secure, just the way you want it.

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Let me give you a couple of brief examples of what we mean, so you can see what were talking about clearly. Roz and Ken had lots of financial problems. They were in their 60s, in good health, and had retired a few years earlier. They had a typical mess. The kind of mess we see all the time. They had:

Four life insurance policies that they had owned for years, and had no idea why they owned them, or exactly what they provided. A bunch of CDs from different banks, with all different maturities, rates, etc., al owned as joint tenants. (As most of their assets are, including their home.) A paid-for home. An IRA that was rollover from Kens 401(k) plan at work with several mutual funds inside. A Medicare supplement policy. A collection of assorted stocks theyd picked up over the years, and large chunk of stock Roz inherited from her mom (that her mom had bought 35 years ago). Homeowners and auto insurance from two different agencies. Money set-aside for their grandchildrens education, in CDs, held in joint tenancy with their kids. Some savings bonds Ken accumulated at work years ago. A pension income with Social Security. A Will that was drawn up when the kids were little, over 25 years ago. Some debts like a couple of car loans, credit card bills, remodeling expenses, etc.

While this list may not appear to be a mess at first look, let me assure you, it is a mess. They have no idea if anything they own is right for them. Stuff has been bought or decided without any regard for how every piece fits into the pie.

They have no idea if any of their insurance coverages are correct, if their policies are the best value, if theyre paying too much, etc.

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They have no idea if their investments, CDs, etc., are earning enough to take care of them now, and in the future. They dont know if their nest egg and fixed income will last throughout their expected lifetime. They have no idea if their income taxes are as low as they legally could be. They dont know if their IRA distributions are set up right. They dont know if they are subject to any excess accumulation penalties or even what these penalties are. They dont know if they should sell or keep their stocks, or how to reduce or eliminate the large amount of taxes that will be due if they sell Rozs moms stock. They dont know how, or if, they could pay for a nursing home stay. They dont know if they are protected from losing their assets if they got sued. They dont know how much money they should be putting away for their grandkids colleges. They dont know if the way they own assets (joint tenants) is good or bad. They dont know what would happen if one of them became incapacitated. They dont know if their estate would actually be distributed the way they want. They dont know the true risks they are taking with their investments. They dont know if they should keep the house paid-for, or refinance it, or use other money to pay off debts. They dont know if they should have living trusts, estate tax trusts, etc.

Lots of stuff they didnt know. All because they made decisions without seeing how their whole plan for the future fits together. For example, they didnt understand that each decision they make affects many other areas of their financial situation!

If they change their investments; their taxes, cash flow, retirement income, estate set-up and more will be affected!

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If they refinance their home: their cash flow, taxes, insurance and more will be affected! If they sell Rozs moms stock: their taxes, cash flow, estate planning and more will be affected!

And so on. Everything they do affects everything else. Its like an engine in a car. Every gear, belt, valve, etc. has to work in concert with every other component. If any one part doesnt work right, usually the entire car shuts down. You cant drive a car with its distributor cap malfunctioning, or with a tire thats out of air. It all has to work together. And YOUR MONEY PARTS HAVE TO ALL WORK TOGETHER AS WELL!!!! Just like Roz and Ken, everything you do is important; every decision has to be viewed as how it fits into the whole of your money. Make sense? If you get nothing else out of reading this book other than an awareness of the importance of coordinated planning, and how to think differently about your money and the planning that must be associated with money, then we would have done a good job! (Hopefully, youll learn lots more than that, but if not, we will still feel good knowing you got a new mind-set that will help you for the rest of your life!) So, as we move ahead to the details and chapters in the book, we want you to understand that everything is based on a foundation of planning, planning, planning. There is no substitute for planning! There is no bigger secret than planning! In our opinion, proper planning is the Number One Financial Secret, the best kept, best hidden, least understood, and most misunderstood secret of all. If you just plan, and plan often, and update your plan, youll be ahead of 99% of the game and ensure that you do end up among the few Americans who are financially independent! So, with that note, lets move ahead and start going into the details on how to have a secure and peaceful retirement.

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Chapter 1

PEOPLE DONT PLAN TO FAIL, THEY SIMPLY FAIL TO PLAN

Sometimes old clichs get a little worn, and people feel they're trite and insignificant. However, the other side of the coin is to understand why they became clichs in the first place. People use them over and over because there is simply a lot of truth to them. As we said (a clich, if you will): People don't plan to fail, they simply fail to plan. What's the truth that lies in this clich? Let me give you an example and see if any of this sounds familiar. Bert and Charlene wanted to see if we could help them plan for their retirement. Now the fact that they had both recently turned 65 and wanted to start planning for their retirement might sound a little odd to you. In fact, it's just the opposite. People like Bert and Charlene come in all the time wanting to plan for their retirement...at the exact time they are retiring. They had met in high school, been married for 42 years, raised three children, and had seven grandchildren. They had known each other their entire adult lives. Now they finally reached the point of retirement age and they wanted to be sure they were okay, financially speaking. Let me ask you a question. Do you really think it's a good idea to start planning for your retirement exactly when you turn age 65 and are ready to retire? Bert and Charlene didn't plan too much for their retirement before they retired. They just kind of assumed everything would work out. They had managed to get by financially their whole lives by having things sort of "work out."

They figured out how to get two kids through college (their youngest daughter never went to college but did require financial help with her baby when her husband left her) and they'd always managed to take care of financial emergencies like dental braces, broken furnaces, a new roof, etc. So there they were. Charlene retiring from her job as an assistant to the superintendent of a school district, and Bert, who owned a pharmacy in town and had sold it to his cousin. They just sort of assumed everything would work out fine. Between the two of them, they had over $412,000 saved up in retirement plans. Their home was almost paid-for, and they had very few other debts. For Bert and Charlene, having $412,000 in one place at one time seemed like a heck of a lot of money. Now that they had retired they decided to come into our office to do retirement planning. (As we go through the book, we'll tell you all about how to plan for your retirement and go into much more detail about how to analyze your financial situation and help you figure out what to do based on case studies like Bert and Charlenes.) When Bert and Charlene were presented their plan, they became upset. Very upset. Why? Well, because when the plan showed them that based on their goals, how much money they wanted to have, and the things they wanted to do, their retirement nest egg wouldn't last them more than 9-10 years. Somewhere around age 75, they would be basically broke and living on Social Security and Charlene's small pension. They were very angry and wanted to know how anyone could tell them such a stupid thing. Anyone would know that $412,000 was a ton of money. They worked their whole lives to save up all this money, and it should be able to last them through retirement. And who were we to tell them they couldnt make it? We are not being critical in any way of Bert and Charlene. But, Bert and Charlene made a very big mistake. They made the assumption they could start planning their retirement the day they retired. Thats much like planning your wedding on the day of your wedding. Most people are familiar with the concept of planning for a wedding, and no one in their right mind would consider getting up on Saturday morning, making some phone calls and hoping everything went well that afternoon. Bert and Charlene made a classic mistake.

They didn't plan to fail, they simply failed to plan. It's been our experience that Americans procrastinate more about financial decisions than about other things they need to deal with. We will generally be very diligent about planning for all sorts of things in our lives, but when it comes to money, we just simply don' t do it. We find all sorts of reasons why we can't: "We'll start planning when the kids are older..." "We'll start planning when I get my new job...." "We'll start planning when we get back from vacation ..." "We'll start planning when the house is finished "We'll start planning when the kids are done with school ..." "We'll start planning once the car is fixed..." We'll start planning when I get my degree..." "We'll start planning once..." All these reasons, all these excuses, all these rationalizations. And, the bottom line is planning for your financial future is probably one of the most important things you can do with your time. As you read through this book and listen to the stories and case studies and think about your own life, please understand there is one thing we want you to get out of this book if nothing else: You have to plan for your financial future, because nobody is going to take care of you... but YOU!

The government won't take care of you, and your company won't take care of you.
The only person who will take care of you...is YOU!

Chapter 2

THE LOST SECRET OF PLANNING

You know, it's funny. The more things change, the more they stay the same. Here we are in a new millennium in America, the greatest country on earth. A very sophisticated, technically oriented country. Its a country where advancements are being made every day and where progress is always expected. Where moving ahead is always the goal. And yet, we're not much different in many ways from the ancient Babylonians and Egyptians who also had the same goals and the same underlying foundations of progress and expectations. It's our belief, after studying people for all these years, reading about our current culture and the way we think, reading about cultures from the past and ancient history, that people are still people. A lot of the things you think about, and we think about, are the same things people thought about 5,000 years ago. Things like making a better life. Making things bigger, better, safer and stronger. Things like taking care of your family as your primary consideration. Things like having a loving relationship with your spouse. Things like making money. Things like gaining power or prestige. And so on. In a lot of ways, there really isn't anything new under the sun. When you really look at it, the countries and cultures that have been successful, that have made an impact on the world, used the one technique and secret that we seem to have lost in our world. This secret is so full of common sense that it begs to be used over and over again because it works so well. It's one we seem to have forgotten and don't spend much time or energy doing anymore. What is the secret? We talked a little about it already. It's planning. Yes, the lost secret of planning.

Let me ask you a question. The ancient Egyptians built the pyramids. Ancient civilizations built those gigantic structures without any of the sophisticated tools or technology we have today. Do you really think they walked out into the desert one day, looked at each other and said "Let's build some pyramids!" and then started building? Now no one knows for sure how long it took them to build the pyramids or even for sure how they were constructed. But the one thing we do know is that they planned for a long, long time before they began moving those heavy stones around the desert. There's really nothing new under the sun. The things that we do now, correctly and incorrectly, are the things that people have always done correctly and incorrectly. In our opinion, one of the things people do correctly is planning, and conversely, one of the things people do incorrectly, is not planning. Everything you do in life revolves around some sort of planning. What about just planning your daily schedule? Most of us don't make it through a day without having some sort of plan about what we're going to do. We might decide a week ahead of time, a day ahead of time, or maybe that morning. We don't just get up and do things. We have some sort of idea what we're going to do first and how we will do things. Where we're going to go. When we're going to go. How we're going to get there. What we're going to do when we get there and when we're going to come back. With whom we're going to meet and when we're going to meet them. Your whole day and life revolve around planning. You plan your trips to the grocery store. Most people make a list before they go. When you don't make a list, don't you come home with more than you really wanted or needed, and/or maybe you forgot things? The best way to go to the grocery store is to first plan your trip, make a list, then go and follow your plan. Don't you usually come back with exactly what you need and want...versus just showing up at the store and coming home with too much or too little? We even plan little things like getting gas in our car. We'll make a mental note that we're low on gas and plan when we're going to get the gas, i.e., "I'd better stop for gas before I go into the office" or "I have enough gas to make it into the office but I'd better make sure I fill up before I head home." Those are all plans. Thats planning.

When you go on a vacation, you plan everything before you go. You know where you're going, how you're going to get there, when you'll return, how long you will stay, etc. You plan your meals. You plan what time you'll eat, what you'll eat, how you're going to make it, where you're going to buy it or where you're going to get it from, when you'll bring it home, who will share with you, who won't be there, how much it will cost, and so on. We could go on, but we won't. We think we have made the point. Planning is integral, central and necessary to everything that we do in life. It is truly the lost secret. What about our money? Most Americans literally spend less time planning out their financial future than they do a trip to the grocery or hardware store. All the little details that we think about in our daily activities and plan for are ignored by most of us when we deal with our money. If we try to do it, we get sidetracked, or we procrastinate, or we do something of more immediate consequence, and it never really gets done. Most Americans, no matter what incomes we have or what we do for a living, will end up not being able to retire on the standard of living that we had before we retired. The most complicated things are usually the most simple. It really is simple to plan for your future. But in order to plan properly, first you must understand that you need to plan. We don't know any other way around it. There is no secret, no technique, no method of doing things we have ever found that works better than planning. If you look in the dictionary, the word "planning" is defined as: "To form a scheme, a method for doing, achieving, etc." Something we do for virtually everything we accomplish in our lives. Everything except for our financial future, that is.

When you think about it, it just makes so much sense to take the time to plan for your future. There are three steps you need to plan for the future that we will cover in this book. 1. First, finding out where you are today, 2. Second, where you want to go, and, 3. Third, building a plan to get there. It's that simple and that complicated. To start out, review and think about the following commonly asked questions:

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17)

What is my net worth? Where are my assets? Why do I own these assets? How are they titled? How much will these assets earn before I retire? If I'm already retired, what should I do with these assets? How much do I need for food, clothing, shelter, travel and other non-investment expenses? Where does the money come from to pay for these expenses? (Savings, income, social security, etc.?) How much will these expenses cost tomorrow? How much will they cost ten years from now? Will my current income keep up with inflation and the cost of living? What tax bracket am I in? What income tax planning has to be done to minimize taxes in my tax bracket? What would I want to happen if I got sick, mentally incapacitated or died in the near future? What have I done in regards to estate tax planning? Do I have any unrealized capital gains that may have to be paid someday? What taxes do I need to consider when investing?

Good questions, don't you think? Can you honestly say you can answer them? Let me give you an example of how planning works and how important it is to help you make informed, educated decisions.

John and Mary Smith are both 57 years of age. They have no children living at home, and they are currently in the 28% tax bracket. They have $100,000 ($130,000 originally) left on their mortgage. Their monthly principal and interest payments are approximately $864 based on a 7% mortgage rate. They currently have $150,000 in CDs earning 4%, which represents most of their investments. Would John and Mary be better off paying off some or all of the mortgage today? This is a common question, and most Americans don't really know how to figure out which makes the most sense for them. Although every family has a different situation, let's look at some of the facts in this case so that we can help John and Mary make an informed decision. John and Mary have always been told that paying off their mortgage early was a bad idea because they get a tax deduction on the interest. However, the critical question most people forget to look at is, "At what point does the interest deduction continue to make sense?" Let's look at some simple facts: The Smith's make around $6,000 per year in earnings on their CDs. However, after paying 28% income taxes, they end up with only about $4,300. In addition, the Smith's currently pay $10,400 in yearly mortgage payments. Out of that amount, approximately $7,600 is deductible interest. At a 28% tax bracket this means that the Smiths can save $2,128 (28% of $7,600) in taxes. The real calculation is done by comparing the after-tax rates of return on both of the options, and then deciding. The CDs earn 4%, but after paying taxes at 28%, they really only earn 2.86%. Therefore, the Smith's investments are growing by 2.86%. Their 7% mortgage rate is really 5.04% after taking into account that the interest rate of 7% is tax deductible. So, they are making 2.86% after taxes on the CDs, and losing 5.04% after-taxes on the mortgage! They are losing 2.18% every year! (2.86% CD net return less 5.04% mortgage cost = -2.18%.) Since they are paying more than they are making, it would make sense that they increase their net worth by using the CD money to pay off the home. In essence, investing in the home and paying the mortgage off would actually be more profitable!

This can be quite confusing because even though they saved money in taxes, they had actually lost money! This is because they paid more in interest than they made. On the other hand, if the Smith's had been in other investments instead of the CDs and were making 11%, the numbers would look different. Now their 11% taxable return would produce 7.92% in after tax return, which is higher than the 5,04% after tax cost of the mortgage, providing actual growth because they're earning more after taxthan the cost of the loan after tax! So, in this example, they'd be better off not paying off the mortgage because they are earning more than the after tax cost of the loan. If this is confusing, don't worry, most people find tax rules confusing. The important thing to remember is that with a little knowledge and some good advice the average American could save thousands of dollars each year with proper planning. Your financial situation will always have a major impact on your family and your family's well being. It's very hard to separate our lives from our money. As we move through this book, let's keep in mind how important this issue of planning is. You will see everything we talk about, everything we teach, everything we counsel people on is centered on planning, planning, and more planning. It is truly the lost secret of the ages. Once you understand where you are, where you want to go and what options and choices you have on how to get there, you can make better decisions. Decisions based on a complete understanding of the options that you have acquired through planning. You'll be in the best possible position. You'll be making choices based on an understanding of the options, the pros and cons, and know that you're working in a logical and scientific manner...as opposed to just doing things based on emotion, salespeople's pressure, your brother-in-law's sage wisdom or something you heard on CNN. No one can guarantee success. No one can guarantee you won't have financial problems. No one can guarantee things will go perfectly. It would also be ridiculous for us to make those statements. What we can do and say with confidence is:

Planning will give you the best chance to reach your goals! Planning will give you the best chance to deal with problems and changes in your life and in the economy. Planning will provide you the best chance to achieve the peace of mind and contentment we all are seeking. Sometimes we feel we are a lone voice in the wilderness crying out saying, "Please people, plan your future, plan your finances, take the time to do it!" Many financial advisors are more than happy to sell you products based on what they want you to buy, and/or sell you products based on the commissions they earn. Some firms talk about financial planning, but very few really take the time to figure out what your situation is, and how to help you make the best objective choices based on the best options available for you to reach your goals. We're going to teach you more about that in this book. Our focus has always been based on planning and we hope that yours is, too. Think about it. Planning is defined as: "to form a scheme, a method for doing, achieving, etc." There are three steps to plan for the future:

1) Find out where you are today. 2) Decide where you want to go. 3) Build a plan to get there.
If you leave this book with a better understanding of how things really work, and how to think correctly about planning for your own future and well-being, you will be well on your way to a peaceful retirement!

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Chapter 3

SIX WAYS TO LOSE OR RUN OUT OF YOUR MONEY

No retiree ever wants to run out of money. No retiree ever wants to lose his money. No retiree ever wants to be dependent. Unfortunately, all of these things happen far too often. Most retirees haven't been advised, or learned how, to set up a financial plan that will allow them to protect themselves from any of the six major ways one can lose or run out of money. Most folks arent aware of these until they experience them. These six areas continue to cause problems for retirees. Problems that can be reduced or eliminated through proper planning. As we go through this book, we will be discussing these various areas in much more detail, and how you can protect yourself from them through knowledge and planning. For now, we want to introduce these six dangerous items, have a brief discussion about them, and set the stage for later chapters in the book where we will discuss them in more detail. In our opinion, the six dangers causing the most problems for retirees, and creating the greatest chances for them to lose or run out of money are: 1. Taxes. 2. Catastrophic medical expenses. 3. Inflation. 4. Bad investment planning. 5. Lawsuits. 6. Passing away without having a proper estate plan. Any one, or a combination of these items, can wipe out an entire life's savings, sometimes overnight! We're not trying to scare you here. In fact, just the opposite. This book is based on reality, and sometimes reality isn't pleasant.

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Many retirees learn far too late about any one, or all of these six items. It's our job in this book to help you be aware of them, and know how to deal with them, so that there is as little chance as possible that they will affect your financial security. We don't want you saying, "How could this happen to me? So we want to give you the tools, knowledge and questions to ask so you can avoid having to say that altogether. Now, let's briefly discuss the six items and how they can affect you and your retirement security. 1. Taxes You would think it would go without saying that retirees would want to pay as little tax as possible. That retirees would want to use every legal loophole available to them to reduce their taxes. But thats not the case. Most retirees that we see who haven't done planning are paying more taxes than necessary. They're paying maximum income taxes. Most retirees have their situations set up so that they don't take advantage of more than a few, if any, of the tax savings loopholes that are available to them. We'll go into more details about tax savings opportunities in Chapter 5, but for now we want to make sure you understand you are not required to pay the most amount of taxes possible. It's your right, and, in fact, one judge said it's your duty to learn about all the loopholes available to you under the law and take maximum advantage of them to reduce your taxes! Think about this. If you saved $200 a month in income taxes by rearranging your financial affairs, and invested that money at only 4%, over a period of 10 years, it would grow to a sum of over $25,000! That's $25,000 of money that you would otherwise have squandered if you'd paid it in taxes, because once it's gone, it's gone. Wouldn't you rather keep that money? Saving $200 a month in taxes is child's play for most retirees if, and this is the big IF, they take the time to learn about the strategies they can take advantage of to save them money.

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Keep in mind that every year there are usually hundreds of changes made to the IRS rules! They've recently changed all kinds of laws on things like capital gains, estate taxes and so on. If you dont know how to integrate these changes into your plans, you could easily make mistakes that could cost you hundreds or even thousands of dollars. We think it is an absolute shame to see so many retirees sending their hard earned money off to Washington on a one-way trip to never be seen again. Don't let taxes ruin your financial security. Make sure you keep this in mind when you read Chapter 5, and pay attention to the legal loopholes and strategies we're going to show you for saving taxes. 2. Catastrophic Medical Expenses The health care crisis in America is real and out of control. The government has been a major contributor to this crisis, and does not know what to do about it. But the fact that it's a mess doesn't change your situation. It doesn't help you to say it's a mess and blame the problems on the government and insurance companies. You need to take care of your own situation. 43% of the people reading this book are going to spend some time in a nursing home, according to the U.S. government. Thats 43%. Almost half. (Source: New England Journal of Medicine.) In fact, with increased survival to age 65, the number of 65 years olds ultimately using nursing homes are projected to double by 2020. You have got to plan how you're going to take care of your long term health care needs since the odds are very high that at some point you will either have to stay in a nursing home, or require long-term care. Sure, your health insurance and Medicare will pick up most medical expenses while youre in the hospital, but they won't pick up the bulk of the costs of long-term care once you leave. In fact, Medicare pays nothing for long-term care other than a limited amount for the first 100 days, and then only a small percentage of the people who apply for it actually receive it. We'll discuss catastrophic medical expenses in more detail in Chapter 10. We want you to start thinking about the fact that the way the program is set up now, you are responsible for long-term care expenses, and other uninsured medical expenses not covered by Medicare or your health insurance. Just remember, nearly half of the people reading this book will spend some time in a nursing home or require long-term care, which is currently running

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$4,000 - 6,000 a month on average (this is projected to be between $8,000 10,000 a month in 10 years). The laws are always changing! It's very important to get the proper legal and financial advice before implementing your retirement plan! Extended care, whether at home or in a nursing home, is unfortunately a fact of life that needs to be addressed today. In order to protect yourself and your loved ones from the catastrophic effects of outrageous medical expenses, it is wise to obtain the services of an expert. Don't make the common mistake of thinking that you can interpret the ever-changing laws yourself. You either have to have a plan to change the way your assets are owned, get the proper insurance to cover this sort of expense, or take the risk of being wiped out. This is not a pleasant topic, but it must be faced and addressed head on. Long-term medical care is the Achilles heel in most retirement plans. Yet it need not be if addressed early on. There are many new and creative plans available today that were not on the market a few years ago. 3. Inflation We'll go into much more detail about inflation in Chapter 4, but we just wanted to briefly mention that inflation in and of itself has destroyed more retirements than any other factor we've ever seen. As we just mentioned, about half the people reading this book may have to spend time in a nursing home. That's bad. What's worse is that inflation affects all of the people reading this book. Inflation is defined as the "cost of things you have to buy going up in price." Inflation is not going away, is not under control, and can devastate your financial situation. Even though the government tries to downplay the role of inflation, from our point of view, we cannot downplay it at all. We've seen too many people outlive their money, be forced to reduce their standard of living significantly, and depend on friends, family and charity to survive, simply because inflation took what was once a comfortable fixed income at one point in their life...and turned it into a meager, if not unlivable, income as the years rolled by.

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Don't think for a second that just because the government says inflation is licked, that it really is. The rate of inflation fluctuates. And while the statistics issued by the government say the inflation rate is under control, it is not okay. For example, the government statistics say that inflation is running around 3% as of the writing of this book. But, when you look at how prices have escalated on so many items that directly affect you, there's no way that a 3% figure is realistic for the average American. Just look at what housing and gas prices have done in the past couple yearsIts Crazy! Prices go up constantly, and retirees must face the fact that they must plan their retirement future with inflation as part of that plan in order to have a realistic chance of realizing their goals without altering their life-style, dramatically changing how they live, and/or facing the very real prospect of literally outliving their money. So, yes, inflation is a very real danger that will affect everyone, and one you don't have the option to ignore. 4. Bad Investment Planning This is another big problem area where we see retirees continuing to make mistakes. Mistakes and problems that often cause them great distress during their retirement. Many people don't understand what investments are, or how they work. Most people are not even sure if a CD is an investment. It can be very complicated and confusing. Our purpose in this book is not to give you detailed, technical explanations of different investments. What we are trying to do is point out that if you plan for the future and you have investment planning integrated with your other financial planning, you will know what kind of returns you need to achieve to make your plan work. You'll learn what options you have available to you though the planning process so you can make educated decisions, diversify your portfolio, and have a truly solid investment plan that will give you the best chance of reaching your goals! Of course, you need to establish goals first. Then you need to understand what rate of return you need to earn to make your plan have the best chance of

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working, and then how you have to diversify to make those earnings possible. That can only come through planning. Unfortunately, most people buy investments out of greed, and sell out of fear. They buy investments because they want them to increase in value and expect that they will. If the investment drops in value, they sell out of fear sometimes at prices far below what they paid. This causes destruction of their net worth and their portfolios. Similarly, many people like to "wait" to see how high a mutual fund will go before they buy it. This kind of thinking makes no sense. Tell us one other asset that you would buy where you wait until it goes up higher and higher in price before you bought it. If you buy a car, don't you want to buy it at the lowest cost? Not the highest. Or, do you wait to see if the price increases, and then decide to buy it? The stock market is the only market in the world where when the price goes down, everyone runs out of the store! Investments only work if you buy low and sell high! Your portfolio must be diversified, and set up to meet your goals while considering the risk that you are willing to assume. We will cover those risks in more detail along with more issues about investing in Chapter 13 (Investment Choices Made Easy: The Right Choices). For now, we want to plant the seed that your retirement will be greatly affected by how your investments are set up and perform. Investing improperly, buying high/selling low, or making investment decisions for the wrong reasons will cause many sleepless nights, and there's no need for that. 5. Lawsuits Most retirees don't realize that lawsuits are a common plague, and can cost them some or all of their life savings. Many retirees wonder why they would be sued. They might wonder, "I'm not in business anymore? I'm not in the work force?," and so on. The answer is very simple.

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There are lots of ways you can get sued. Many of them are ridiculous and unfair, but, nevertheless, a fact of life. Believe us, if you back out of your driveway and accidentally run over a child on a bicycle, you will be sued. If you spill coffee on your neighbor's lap, you could be sued. If you invest in your son's business and become a board member, you could be sued. If you are out in the world in any way today, you can be sued. You must set up your assets properly. Know how your things should be owned and how the titles on assets should be set up. And be sure that your liability insurance is set up properly. One brief instant, one blink of an eye, one incident, can cause you to lose your entire net worth and everything you have saved. We'll talk about this topic in more detail in Chapter 12 (How To Protect Your Assets If You Are Sued). 6. Passing Away Without Having Properly Set Your Estate This is another area where we see families repeatedly making mistakes. They dont realize the seriousness and importance of setting up an estate plan that will allow the heirs to receive the assets in the way the family wanted them to be received. One that will minimize the taxes and expenses incurred upon their demise, and prevent the government from taking as much as half of the assets in the form of estate taxes! It's bad enough that many retirees don't even have a will. And the ones who do have a will, have one that's outdated. It doesn't reflect their current circumstances and wishes, doesn't contain provisions if they became disabled or incapacitated, and needs to be reviewed and incorporated with other documents. Again, why go through all the trouble of saving and accumulating and managing your estate if, upon your death, the government and attorneys end up walking away with half or more? And, your family has to wait for months or years to receive the assets left after taxes? Or, having assets go to people that you never wanted the assets to go to? Again, planning is the answer. Planning is the key. We'll talk much more about estate planning in Chapter 11 (How To Protect Your Family And Your Assets When You Pass Away).

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Now that we've stated these six dangers and discussed them briefly, we hope we're setting the stage for what's ahead. We hope we're starting to get your mind working on the many things you are doing...or not doing and how your financial health can be in jeopardy. We hope we are provoking a lot of questions and thoughts in your mind such as, "Am I set up properly? Have we done the right things? Do we know if our wishes will be carried out? Do we have the best chance to beat inflation? Is our portfolio safe and diversified? Are we paying the lowest amount of taxes we legally can? Will our financial plan allow for inflation and help us maintain our life-style without running out of money before we run out of breath! If you are asking yourself some or all of these questions, that's good. Thats what this book is all about. So, think about it. And again, here are the six ways you can run out of money:

1) 2) 3) 4) 5) 6)

Pay too much in taxes Incur catastrophic medical expenses Inflation Bad investments Lawsuits Poor estate plan

Now lets get to the details.

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Chapter 4

THE TRUTH ABOUT INFLATION THE NUMBERS DON'T LIE

The subject matter of this particular chapter is not one that needs a great deal of introduction. We're talking about inflation or, another way of saying it is: the things you have to buy go up in price over a period of time. Now there are all kinds of technical explanations of why inflation occurs. There are many scientific theories and economic models that explain how and why prices go up. We can get this information from textbooks, financial journals, published articles and so on. We're going to skip all that stuff for this book because the reality is that for you and your family... It doesnt really matter why there is inflation. All you need to know is that it is there and understand how to deal with it. It's like trying to understand why and how the sun works, versus understanding how to live your life while the sun is up, and how to live your life while the sun is down. In other words, how to deal with the fact that there is a sun. That's what we're going to cover in this chapter - how to deal with inflation. There's a very important aspect of inflation that must be discussed. The issue of the government, and how the government relays information about inflation to members of the general public. Now, there are all kinds of opinions as to if inflation is created by the government; how the government makes inflation worse than it would be otherwise, and all sorts of related topics. As we said a minute ago, we're not going to get into that here. But we do think it's important to understand the difference between what the government statistics tell you about inflation versus the impact of inflation on your life. Over the past 80 years or so, the government has created indices that it reports to us every month. These reports tell us how fast prices are going up. Back in 1913, the government developed a measure of inflation called the Consumer

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Price Index (CPI). The CPI is a government formula that tells the public how high prices have gone up on average in the United States over a month's period of time. Its then converted to an annual rate of inflation. For example, the government might say that this month the CPI went up 0.4% (4/10 of 1%), which translates to an annual rate of inflation of approximately 4.8%. They might also tell us that in May, inflation rose 4/10 of 1% for the month, but because of lower figures in previous months, the average annual rate of inflation for this year is actually running at 3.7%, not 4.8% as you would assume. Now, we are not sure exactly how important or relevant it is for you to understand how the government calculates the Consumer Price Index. In the interest of keeping this book informative and not boring, we won't go into the detailed formulas of how this is done. We think the simplest explanation, the one that will serve us best in this book, is that the government takes various categories of products and services of a limited nature (in fact, there are a select number of categories they report on) and then takes the average increase in prices on those items, using its formulas. These include housing prices, oil prices, and so forth. So, what's the problem with the CPI? First of all, since the government uses only a limited number of items in calculating the CPI, the result doesn't necessarily reflect the reality of what you're facing when you buy things on a daily or regular basis. For example, housing prices may be down on the nationwide average, which would bring the CPI down, but that may be the only sector of our economy that is going down when other areas of our lives may be increasing substantially in cost. If you're not buying a house, the fact that housing prices went down has no bearing on your life, and what you pay for everything else. This happens all the time. In fact, I can remember one month when a report said that inflation was running at 0.4% (4/10 of 1%), which would translate to about a 4.8% annual rate of inflation. But, they cautioned, we shouldn't pay too much attention to this, because if you took out the jump in food and energy prices, the index would have only been 0.1% (1/10 of1%)!

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This can be somewhat misleading. By telling us to ignore the fact that gas and food prices went sky high it would appear that the increase in the cost of living isnt too bad this month. However, in order for that number to be meaningful in our lives we need to not have bought food or gasoline that month! To us, this is misleading. The costs of eating and driving cannot be ignored. Another problem with the CPI is that because it is based on a formula that was developed years ago, it doesn't necessarily mean the formula is correct, nor does it takes into account all the variables that we face today as consumers. Yet because so many things that we think about in our financial lives revolve around how the government reports inflation to us, this can cause serious problems. Let's take, for example, the story of Grandma Hannah. Grandma Hannah was a retiree in 1965. When her husband passed away he left her with a relatively modest pension from the railroad, a Social Security retirement benefit, an almost-paid-for home, and a modest life insurance policy. In 1965 when she retired, she was receiving a little over $400 a month. She had about $15,000 in the bank, and a mortgage payment of only $97 a month. Her car payment was only $21 a month and her other fixed expenses such as food, utilities, insurance, health costs, etc. only ran about $175-200 a month. When she retired, Grandma Hannah actually had a small surplus cash flow each month (around an extra $50 a month), money in the bank, and a very secure and peaceful retirement in front of her. Or so she thought! But then things really changed. Grandma Hannah was in great health, and ten years after her retirement at age 75, she still had basically the same $400 a month coming in, but her expenses had increased to the point where she was running a negative cash flow (spending more than she took in). Her savings had decreased a bit because she had gone on a few vacations and helped a few of her grandkids with some education costs, paid for part of a wedding, and so on. But, she was still basically okay. She moved into a retirement home. Her monthly expenses were up to around $700 per month. This negative $300 per

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month in cash flow didn't seem too bad since she had funds in her bank account to cover the shortfall. Now we move ahead ten years to 1985. Grandma Hannah is 85, still in really good health, and in financial trouble. Her bank accounts are at zero. She's living in the retirement home, still in decent health but failing, and having to depend on the grandkids to put in money each month to pay her bills and take care of her. If she needed anything, the family had to buy it for her. The $400 a month she was getting at age 65, which seemed OK at the time, was nowhere near enough at age 85!! Grandma Hannah committed the sin of enjoying good health, and believing that she would be okay in retirement. In fact, inflation had wiped her out. Now, let's talk a little bit more about how Grandma Hannah's story relates to the government's so-called measure of inflation, and the reality of what Grandma Hannah faced and what we are all facing as well. According to the U.S. Department Of Labor, Bureau Of Labor Statistics, since 1965, inflation has averaged 4.78% per year. That's what Uncle Sam says. Let's take a look at nursing home costs. If you want to talk about a difference between what Uncle Sam says, and what reality says, let's see how nursing home costs have risen. (We briefly discussed this in the Introduction.) In 1964, the monthly cost of a top end, high quality nursing home was about $250 a month. (No, that's not a typo. You are reading that correctly.) $250 a month in 1964. $3,000 to $5,000 a month in 2006 (depending on where you live). In some urban areas, the costs top out at $9,000 a month! Let's use $4,000 as an average cost, for discussion's sake. Nursing home costs have risen at an annual rate of 8% per year! This is more than DOUBLE what the government says inflation is running!

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Do you ever hear the government talking about these facts: 1. At the same rate of increase, a nursing home stay will cost $100,000 per year at the low endand as much as $200,000 per year (or more) only ten years from now. 2. You will be responsible for those expenses. As the graying of America continues (Thats the Baby Boom generation getting older), the pressure on prices at quality long term care facilities will continue to increase causing the rates to increase at an even higher rate than those we just discussed. As we said earlier, the cost of long-term medical care is truly the Achilles heal in most of the retirement plans that we see today. We'll talk more about this later. For now, we just want you to be aware of how bad REAL inflation is, and what it might mean to you! Let's take college education as another example. In 1976, the cost of a fouryear, public, state university in most parts of the country was around $2,000, maybe $3,000 in more expensive schools. Today, that same education will cost $12,000 or $13,000 per year with nothing added or improved. Same college, same dorm, same books (maybe updated versions), but basically nothing better or different. If you look at the Consumer Price Index and multiply 4.78% out over a 30-year period, the price of a college should only be about $8,000. Let's take another area like your home. In 1968, the median price of a home in the U.S., according to the National Association of Realtors, was $20,100. Today, the median price of a house is $210,000. Using the CPI factor from Uncle Sam, the median price of a house should only be $98,300! But, the real rate of inflation has brought that cost up way more than what the government says. In fact, housing prices have jumped more than 100% higher than the CPI would have you believe! The same thing is true of gasoline. Remember when gasoline was only 59 cents a gallon? We now pay $2.99 a gallon today to fill up our car. We could go on making examples all day long, but we think you get the point.

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The point is, what the government tells us about inflation and what really is happening are two different things. In fact, they are so different, that in our viewpoint, the CPI is a meaningless piece of information. We don't pay any attention to it at all. We can't go into the department store and tell them they have to charge us less for our clothes because, according to the government, the price should only be about half of what they're charging! The other thing that's very important to understand is that different types of items have different amounts of inflation attached to them. Some go up much faster than others. Medical care and college costs, for example, are significantly more inflated every year than other costs. Even a general category, like food, may have certain items that explode in price over a period of time because of shortages, increased production costs, etc. (remember when sugar tripled in price literally overnight?) All this can be summarized by saying there is more inflation than we realize. If we don't plan for it and allow our retirement plan to have a built-in inflation factor; if we don't plan our investments to include a generous amount of inflation to our costs, our retirement plan isn't going to work. Let's carry some of these figures forward to find out what this really means to you. For example, as of this writing, we mentioned a few moments ago that gas is $2.99 a gallon. In 1971, if you had told someone that gas would run $2.99 a gallon, they would have thought it would be too expensive to drive a car. If you had told someone in 1968 that his or her $20,100 house would be selling for $218,900 today, they would have thought you were crazy! (In some places, that $20,100 house now sells for more than $300,000!) When you had a baby 30 years ago and spent about $720 on doctors and hospital fees, you would have thought someone was a lunatic if they told you it would cost $7,000-$8,000 to have the same baby today!

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See, Grandma Hannah didn't realize how bad things were, because she was living her life day-by-day and didn't see the jumps in prices all at once. It just sneaked up on her! Will inflation sneak up on you? That $2.99 gallon of gas we bought today, based on a realistic inflation figure of at least 5% per year, will cost us $4.87 in ten years, and $7.93 in twenty years. Imagine it costing over $100 to fill up your car! The monthly premium on your health insurance that might cost you $500 a month could be $800 per month in ten years and $1,200 per month in twenty years: The car that you bought for $20,000 with a monthly payment of $310 might cost $30,000 with a monthly payment of $450, ten years from now, and more than double that in twenty years. Can you imagine paying $850 per month for a car payment, just to get an average, nothing-fancy type of car? Well, it's no easier for you to accept paying that high of a monthly car payment than it was for Grandma Hannah to accept that her $97 month rent would turn into a $700 month fee at the retirement center for her to have a place to live. Its difficult to imagine a basic car costing $40,000, a dinner at McDonalds costing $15 per person, or paying $10 for a box of cereal. But you had better stop thinking those things arent possible because someday they will become a reality. Slowly and surely your budget will increase. It can be frightening if you dwell upon it. Nevertheless, just because it's scary doesn't mean you can't take action and do something about it. So, what do we do? How do we deal with inflation? Now that we understand it's there and we understand how devastating it's going to be, we're going back to our old friend planning as the solution. So how do we start planning for inflation? The first thing we have to do is figure out what our monthly budget is in today's dollars, and come up with a realistic number of how much after-tax income we need to live on, right now.

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You have to pick one or more inflation rates, and see how much this same monthly budget will cost 5, 10, 15, 20, 25 years from now...to have the same exact lifestyle based on the inflation rates that you pick. Then, you have to take a look at your investment portfolio plus your current sources of income such as your salary, pension, Social Security, and so on, that you're receiving now. You have to figure out what you're actually getting in interest and the return on your investments. This will tell you what your cash flow is today. Then, we'll let the computer figure out how much you need to save and/or what you need to earn on average on your investments and/or how much you have to cut your life-style in order to make the whole thing work. The charts and graphs at the end of this chapter depict what we're talking about. They show a couple whom we named "Retired," retiring right now, with the following situation:

They need $2,300/month to live in today's dollars. They wanted to plan for a 5% annual rate of inflation from here on. In other words, their living costs are projected to increase 5% per year. Their combined monthly income from pension and Social Security is $2,175 per month. Their current investment assets (which includes their savings, IRAs, 401K, stocks, bonds, etc., but does not include the value of their house, since they won't be selling it) are $169, 897.

When they came in for planning, this couple was only short by $125 a month from their fixed income and what they needed to live on each month. They assumed they could make up the difference from the interest and dividends on their $169, 897 "nest egg" and they would be fine. After reviewing their investments, it was determined they were earning about a 4% after-tax rate of return on their money. (A lot of it was in CDs, which don't provide a great after-tax rate of return since they're fully taxable.) Anyway, here's what the graph and chart tell us:

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If they kept doing what they were doing when they came in for planning, they would run out of money and be dead broke at age 86! And that's assuming no one got sick and had to go into a nursing home for any period of time! They would have to earn 9% after-tax on their money to keep up with inflation. The second to the last column on the right shows the results of only earning 4% per year. If however, they increase the rate of return on their investment portfolio to 9%, their investment base and assets would last until age 94, which would basically assure them they would not run out of money during their expected lifetimes!

Now, if they aren't willing to change their investments, the only choice they have is to cut back on their life-style, a lot! We calculated they would have to cut $500 plus a month (in today's dollars) out of their budget, to $1,800 a month, to make their retirement work at a 4% average rate of return! (Which they did not want to do at all since the $2,300 a month was quite a bit less than their pre-retirement income.) Let's walk through the charts at the end of this chapter and youll see how this program works. Everything we're describing here is indicated with a corresponding number in parentheses on the charts. 1. In the first column of Projection #1, we see the $2,300 a month, or $27,600/yr, they need to live on in today's dollars. 2. You'll see at age 76, for example, this figure has risen to $46,205 per year, which is the current $2,300 a month, inflated at 5% per year. At age 86, the $2,300 a month income need has grown to $6,714, or more than $80,000/yr! 3. Their combined Social Security income is $1,009, and their combined pensions are $1,166 a month currently (See column 5), with only Social Security growing each year due to the cost of living raises retirees get from Social Security. (Most people's pensions are fixed and do not grow.) 4. They are currently short $125 a month (See column 4), and at a 4% return on their investments, they will be dipping into principal each year. At age 83, they will be in the hole $29,145 a year, and their nest egg will have dwindled down to $121,403 and within three years, ALL THEIR MONEY WILL BE GONE! (See column 8)

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5. In Projection #2, if they earn 9% on their IRA money and 6% on their other assets, they never run out of money! 6. Projection #3 is the same as Projection #1 except we reduced their life-style to $1,800 per month, a cutback of $500 a month in today's dollars, in order for them not to run out of money. Cutting back on life-style is not what most people want to do. You, like everyone else, do not want to reduce your standard of living when you retire. In fact, most people want to increase their life-style because they have more time to do things and spend money. The pages following the charts show their situation graphically. You can see how different their retirement picture would be if they improved the returns on their investments. This move would allow them to maintain their lifestyle without cutting back. These pictures tell it all.

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If they keep on doing what they've been doing, they will end up just like Grandma Hannah! No doubt about it. Even if we lower the inflation projections a bit, the results will still be similar. This couple's picture is not too much different from most people we see. Whether they are in this income and net worth bracket, much lower or even much higher! (Higher income people usually need more income per month and therefore have just as dangerous a situation as the retired couple in our example.) Remember that inflation doesn't care whether you have lots of money or little money. It wipes out your purchasing power at any income level. It is definitely a non-discriminating villain! So, what's been accomplished by doing a plan like this? We have analyzed what you need to live on in today's dollars, which in and of itself is a good thing to know and a very helpful tool in your planning. Even if you don't do anything about this problem, at least you'll know what you're spending each month. Secondly, you have a realistic plan based on a realistic expectation of inflation and not the unrealistic CPI figures the government would have us use. Finally, we see what happens to you if you don't change the way you invest or spend money, and how you may need to alter some of your investments in order to give you a potentially better, higher rate of return. A better yield will give you have a better chance of making your retirement plan work and deal with the inevitable inflation you will face! No one wants to end up like Grandma Hannah. No one wants to end up dead broke and having to depend on your family or other charity to take care of you. There are lots of Grandma Hannahs out there, and lots more Grandma Hannahs are doomed to happen! We don't want this to be you. Just because you might be okay today doesn't mean you'll be okay somewhere down the road.

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People live a lot longer now and this makes the effects of inflation even worse. All the improvements in health care combined with the increasing health consciousness of the American public have created a bigger problem in retirement! The longer you live, the more you will need your money to grow so you can beat inflation! There are many things in this book we believe are critical to understand and know what to do about. Inflation is certainly one of them. Don't be naive and stick your head in the sand and just hope things will turn out okay. These days that type of "planning" won't work. No one has a crystal ball to know exactly what the inflation rate will average over the coming years. But that doesn't mean we can't use the past to help us make some educated guesses in planning for the future. We think that the chances are good that the average rate of inflation will be higher than what we have experienced in the past due to the increasing national debt. So, if inflation in fact gets higher than it's been in the past, the chances of having the Grandma Hannah problem are even greater. Even if inflation stays where it is now or drops a little, we still have to prepare. As we have said in the previous chapters of this book, in our opinion, the only real answer is to plan. Plan and then plan some more. Monitor your plan, update your plan and make adjustments as necessary so you're always on target and you don't ever end up like Grandma Hannah. Inflation is the most overlooked monster lurking out there to bite your financial head off. Don't pretend by ignoring it and hoping it will go away. It won't, no matter what our government and economists tell us. So YOU have to take the right actions if you want to be secure and not end up like so many Grandma Hannahs! Think about it:

Inflation means "things you have to buy go up in price over a period of time."

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The Consumer Price Index is an inappropriate government formula for financial planning purposes. Grandma Hannah committed the sin of enjoying good health and believing she would be okay in retirement, when, in fact, inflation had wiped her out. At the current rate of inflation, a nursing home stay will cost $8,500 - $19,000 a month in ten years. The government will not pay for this. Nursing home costs are rising at twice the official inflation rate. Inflation can wipe out your purchasing power at any income level. It does not discriminate!

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Chapter 5

WHAT THE IRS DOESN'T WANT YOU TO KNOW!

The IRS. Three letters that bring concern into the minds of all. The tax collector. A modern day version of the Sheriff of Nottingham Forest. Paying taxes is an act that people have hated since the beginning of mankind. All through history, you can find story- after-story and tale-after-tale of people fighting the tax collectors. In fact, there's a country you might be aware of that was founded with the slogan "No more taxation without representation." (Sound familiar?) Well, these days, most of us do have taxation without representation. There is very little you can say or do, that will affect what tax laws are in place, or how the tax laws are created. What you CAN do is understand how tax laws work, understand how tax planning works, and be aware of the options that you have and can use to legitimately, legally and safely reduce your taxes. We mentioned in Chapter 3 that even saving as little as $200 a month over a period of years can be worth tens of thousands of dollars of extra money in your pocket. We also want to re-emphasize that you have absolutely nothing to fear from the taxman if you follow the laws. Many people tell us they don't want to do any tax planning or take advantage of any tax strategies because they are worried about "getting audited." Well, you may get audited at some point - who can tell? When you have done nothing illegal, followed the tax laws exactly as written, used the IRS' own tax rules, there isn't too much that can happen besides using up your time with an audit. Remember, they can't do anything when you follow the law.

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In a famous court case decades ago, Justice Learned Hand, when issuing his opinion in favor of the taxpayer, said that taxpayers not only have the right, but the duty, to use every legal strategy available to them to reduce their taxes. Taxpayers are not required to pay any more tax than the lowest amount the law demands. This theory, and way of thinking, must become a way of life. As you plan for retirement, you must plan out your taxes and reduce them as much as possible. No matter what stage you are in life, no matter what you are doing, we can't imagine why anyone would want to pay more taxes then required by law! Since we see so many people overpaying their taxes, it must come from not understanding the tax laws. Not understanding how tax planning works, or mere procrastination and lethargy. We're going to put an end to that now! We're going to show you how you can save taxes, give you some concrete ideas on how to reduce the taxes you pay, and be in a position to put more money in your pocket every month instead of Uncle Sam's. Let's start off with a brief discussion of what tax planning really is. Tax planning involves three things:

1) discovering the different strategies you can use to make wise choices and educated decisions concerning the tax strategies you want to implement; 2) understanding them fully; and finally, 3) integrating your tax situation with your entire financial plan.
As we've mentioned about financial planning in general, everything you do in one area of your financial life will affect all the others. Nowhere is this truer than in the tax area. There is nothing you can do, financially speaking, that does not have an effect on your taxes.

If you keep your money in the bank, that affects your taxes. If you take your money out of the bank and put it somewhere else, that affects your taxes. If you sell stocks, that affects your taxes. If you buy a house, that affects your taxes. If you sell a house, that affects your taxes.

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If you set up certain trusts and wills for your estate, that affects your taxes. If you make gifts, that affects your taxes. If you have a part-time or full-time job, that affects your taxes. If you own any kind of business, that affects your taxes.

Every activity, financially-speaking, will be reflected somewhere on those tax forms. Since tax planning and investment planning are so intertwined, they must be done together, in concert, so every decision you make will be integrated and coordinated with the other areas of your financial life. The first tax strategy we're going to talk about is tax deferral. 1. Tax Deferral Tax deferral is the concept of having earnings on your investments not be subject to current taxation, but only be taxed when you take money out of the investment at some point in the future. Let's take a look at an example of how powerful tax deferral can really be. Ed and Bob both had $250,000 to invest. Ed decided to put his money in a 5% CD at the local bank. Bob decided to put his money in a guaranteed fixed annuity that will also pay 5%. Furthermore, let's assume that both Ed and Bob are in the 28% tax bracket. Ed made $12,500 (5% of $250,000) each year, but has to pay $3,500 (28% of $12,500) in taxes each year on his earnings. Ed will never see that money again and will never be able to use it for his benefit. Ed's asset is really only growing by 3.60% (5% minus 28% in taxes) each year. If Ed kept his CD, paid tax each year as he has been, Ed would end up with $507,148 at the end of twenty years after paying all taxes. Not a bad sum. Because Bob invested his assets in a tax deferred annuity, Bob doesnt have to pay any current income taxes on his earnings. Therefore, his assets really do grow by 5% tax deferred. If Bob holds the asset for the same twenty years, his balance will be $663,324. However, Bob never paid any taxes on the growth of $413,324. If he were to cash in the annuity, he would have to pay all of the taxes on the growth. In keeping the comparison fair lets assume he could cash it all in at a 28% tax bracket, (for example purposes) he would pay a tax of

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$115,730. This would leave him with $547,594 after-tax (But keep in mind, in the unlikely event Bob did cash out all at once, he would be put into a higher tax bracket). The bottom line is because Bob controlled his taxes, he was able to make an extra $40,446, after-tax! By controlling taxes you can make substantially more money. This is the whole reason that IRAs and pension plans are so popular. You don't have to pay any taxes until you withdraw the money, which hopefully will be at a lower tax rate in the future. The larger the growth rate and the larger your tax rate, the more important deferral is. There are many ways of deferring the tax on your assets. Annuities, life insurance, IRAs, 401(k)s and 403(b)s all provide tax deferral. These are just some of the legal programs that allow the owners not to pay taxes on the earnings until they withdraw them from the plan. 2. Charitable Remainder Trusts (CRT) How would you like to be able to sell an asset that's gone up in value, pay $0 income tax (capital gains tax) no matter how large the profit, and be able to keep earning income from investment of the proceeds of the sale for the rest of your, and your family's lives? You can also take charitable deductions and be able to have a big chunk of money go to charities at your death without your family losing any money. Sound interesting? What we've just described is a Charitable Remainder Trust (CRT). We will tell you a story about Julia and Bill. They were a couple in their early 70's in great health with lots of kids and grandkids. Years ago, they bought some land way out in the country for $10,000 thinking they might build on it some day. The years passed and they never paid much attention to the land and, for various reasons, never did anything with it. As progress moved outside the main part of town, they soon discovered their little piece of $10,000 land was in the path of development, or a gold mine, you might say. As the development came closer and closer to their land, the price of the land started rising in value. Julia and Bill really didn't want to sell the land because 1) they didn't want to pay the taxes on the profit and 2) they didn't know what they would do with the money anyway. The land just sat there.

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When they came in for retirement planning, it was pointed out that this land (which they estimated was now worth about $1 million) wasn't doing them any good. They weren't receiving any income. Their property taxes were going through the roof. They were advised to have liability insurance because of the risk of teenagers partying there. We told them that they should consider selling it. Bill and Julia protested and said income taxes would kill them. They had talked with their accountant who said the profit would be close to $1 million and they could expect to pay about $200,000 in capital gains taxes from the sale of the land. The money left over would be a nice chunk of cash, but the thought of pouring $200,000 down the drain really bothered them. We asked them if they had heard of a Charitable Remainder Trust. (CRT) After we explained it to them, they were very excited and set one up. Here's what happened. Julia and Bill set up a Charitable Remainder Trust naming their church and the church school as beneficiaries. They were named co-trustees of the Trust, and the property was re-titled and donated to the CRT and owned by the CRT. The act of donating this property irrevocably (meaning it could never be changed) generated a huge charitable deduction. (The complications involved in the calculation will be omitted for purposes of simplicity.) The donation of $1 million worth of land generated over a $300,000 tax deduction which, spread out over the next few years, could save them as much as $100,000 in income taxes. That's not the best part. The best part is when the Trust took title to the property, Julia and Bill, as Trustees for the Trust, sold the property to a developer and received $1 million. The $1 million went into the Trust and was now sitting as a cash investment of the Trust. The capital gains tax paid upon the sale of an asset with a million dollar profit was exactly $0! Yes, that's right. Zero capital gains tax. Since the Trust owned the property, and the Trust was a Charitable Trust, it was a tax-exempt entity, and therefore, any sale of assets inside the Trust was completely free of capital gains tax.

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Now, instead of having $800,000 left out of $1million, they have $1 million left out of $1 million because they paid $0 capital gains tax. (They did not lose the $200,000 they would have lost had they sold it the usual way most people would have sold it.) It's still not over. They also saved $100,000 in income taxes over the next several years with charitable deductions, and they saved the original $200,000 in capital gain taxes for a total of $300,000 in saved taxes. And, they still have $1 million sitting in the bank that they control. Now, they can never get the principal out of this Trust, but they do get the income that the Trust generates for the remainder of their lives. They invested the $1 million with a careful investment plan and were able to average 7% on the money with basically little risk. They are earning $70,000 income a year off the $1 million in the Trust. Keep in mind, if they had sold the land outright they would have only $800,000 left after paying taxes. If they earned 7% on that $800,000, they would only be receiving $56,000 in income, or $20,000 less per year. This is because they would have lost the ability to earn interest on the $200, 000 that would have been paid in taxes. The last thing Julia and Bill did was set up a Wealth Replacement Trust funded with a secondto-die life insurance policy for $1 million. So, when they pass away, their family will still get the $1 million they would have had if they still owned the land. But instead of the land providing the money, the life insurance will provide the money. They were able to buy the life insurance policy using a very small portion of the tax savings they realized from selling the land asset through the Trust. And, on top of all that, the $1million dollars will be free from both income and estate taxes! Is this amazing or what? Charitable Remainder Trusts are one of the best tax planning techniques ever to come out of Congress and have been around for decades. They are perfectly legal. Yet hardly anyone understands or uses them. But they are a great example of a sound tax strategy that can save you money even if the assets you want to sell are only worth $100,000 instead of $1 million. Just reduce Julia and Bill's numbers by ten.

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Do you think the IRS will tell you about Charitable Remainder Trusts? Has your accountant or attorney told you about Charitable Remainder Trusts? Most likely, no. It is a little known technique that many advisors are not that familiar with. We think it's about time for every American and every retiree to have the opportunity to understand and use this idea if it fits their situation. If so, don't forget that you MUST set up a CRT ONLY with the advice and counsel of your tax and legal advisors! Anything related to income tax and charitable donations must be done exactly right, and the rules change frequently! This is not a do-ityourself project. 3. Change Your Assets To Earn Tax-Free Income There are many areas of the economy where Congress has decided to give tax breaks. Certain programs, if you invest in them, will give you tax-free income. For example, did you know that the cash value of many life insurance policies can be taken out tax-free? Yes, it's true. The money grows tax-free and the gain can be taken out tax-free through borrowing. Many people are unaware of that. Many real estate investments can provide you tax-advantaged income. Depreciation and other expenses can offset the money you receive as rent, so the earnings you receive monthly or quarterly may be partially or even completely offset so the cash flow could end up not being taxed! Municipal bonds, of course, provide tax-free income and may fit into your portfolio. However, too much tax-free income may cause your Social Security to be taxed. Remember we said that one action might trigger another adverse reaction. Planning can avoid these surprises. There are numerous ways you can receive tax-free income instead of purely taxable income. Are you starting to see why keeping your money in the bank or mutual funds that pay taxable dividends may not be in your best interest? Have you ever thought about saving money in equity indexed annuities that have the same mutual fund managers except all the earnings are deferred inside the annuity? You pay no tax on the dividends or gains until you actually take

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out the money. The proceeds are passed to your heirs free from probate. And, your heirs can be guaranteed to receive the highest value your account reached on the policy anniversary during your lifetime regardless of where the market is on the day you die! We could write volumes on tax savings strategies, but we won't go into the technical details and bore you or confuse the issues. We hope you can see that there are many ways to save money in income taxes that you could be taking advantage of. If you are like most of the clients we see, you aren't taking advantage of any of these perfectly legal strategies to keep your hard-earned money. One final story to share with you as we close on this chapter. Vince and Betty, a couple in their late 70's, were referred to us for financial planning by their cousins. When we reviewed their financial situation, we saw their total investment portfolio consisted of $300,000 in CDs. The earnings on the CDs at that time were approximately 6%, or $18,000 per year. Based on their tax bracket, this $18,000 of taxable earnings was costing them approximately $5,400 per year in federal taxes. The sad thing was, this $5,400 was paid needlessly because Vince and Betty did not use that money to live on. Betty had a trust fund she inherited from her parents and Vince had a big pension and Social Security income. Their house was paid for, their cars were paid for. Their kids were grown and on their own. Basically, they were in great financial shape except they were paying $5,400 in taxes they didn't have to pay. We showed them some different options for their planning including fixed rate and equity indexed annuities. After seeing the difference these savings vehicles made in their plan, they decided to go ahead and reinvest their CD money into these other options. When we saw them again a few years later to review their financial plan, Vince and Betty were still in good health and enjoying their retirement years. They told us, "We just wanted to thank you so much for pointing out other options to us and how to save $5,400 a year in taxes. We've been using that money we're not paying in taxes to set up a scholarship fund at Vince's Alma Mater for underprivileged kids so they can afford to go to school. We never would have been able to do that without your help." See, that's the beauty about saving tax money. The money can go anywhere. It can be used for charitable purposes, your family, vacations, a house addition, to

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pay bills, improve your life-style, whatever. Anything is better than paying needless taxes! Bear in mind that tax planning is not just for the rich, it's for everybody, and you must - we repeat, MUST - discover your options and use your options to save that tax money and put it to better use. We can't get rid of your taxes altogether, but we can help you get rid of some taxes. This is a key point we hope you spend a lot of time thinking about. Think about it. Tax planning involves:

1) discovering the different strategies you can use to make wise choices and educated decisions concerning the tax strategies you want to implement; 2) understanding them fully; and finally, 3) integrating your taxes with your entire financial plan.
Tax strategies include:

Tax Deferral Charitable Remainder Trusts (CRTs) Repositioning Your Assets For Tax-Free or Tax Deferred Income

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Chapter 6

FIRST THINGS FIRST HOW TO KNOW WHERE YOU ARE TODAY

The first step you have to take in retirement planning is to figure where you are today. In any journey, you'll never get to where you want to go without knowing where you're starting from...and where you want to go! (We'll talk about where you want to go in the next chapter.) As we've already discussed, the journey of planning has to begin somewhere. And that somewhere is an understanding of everything you have going on right now. An "inventory" and "diagnosis" of your current situation, you might say. For example, if you want to increase your return on invested dollars, you first have to know how much money you have, and what your after-tax rate of return is on that money. If you just started changing things without knowing what returns you're getting now, how could you make an educated decision about what to change, what to change it to, and how much to change? The answer is that you couldn't. We know it sounds silly to say that you must know these things first before making decisions. It might sound silly, but we cannot tell you how many people we see who have made all kinds of decisions without knowing what they were doing before they made the changes. They had no specific idea what their current situation was, yet made changes anyway. Sometimes they got lucky and improved their situation making changes blindly. More often than not, they ended up in worse shape. And, many times...there's no way to tell! How can you tell if you are better or worse if you have no idea what you're comparing your new results to? It all comes down to this:

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The First Step In Retirement Planning Is To Know Where You Are Today! You need to know things like: 1. Your current cash flow. 2. Your expenses. 3. Your investment amounts and rates of return. 4. Your liabilities. (How much you owe.) 5. Maturity dates of CDs, annuities, etc. 6. Who owns what. 7. What you paid for things like stocks, bonds, etc. 8. Your current tax situation. (How much you have taken out for taxes, or how much you pay in estimated payments, what your deductible expenses are.) 9. Your current insurance coverage. 10. Any employer provided benefits like insurance, pensions, 401(k)s, etc. 11. How much your personal assets are worth. (Like your home(s), car(s), jewelry, etc.) 12. Any government benefits received. (Social Security, pensions, etc.) 13. Your current estate planning arrangements. (Wills, Trusts, etc.) And so on. As you can see, you need to gather together a complete list of everything you have going on. You can't get a handle on what to do until you know what you have. You may have to dig through some old shoeboxes, safety deposit boxes, files, drawers, and so on to find everything. You may have to make some calls to get updated information on some things. You may have to call your broker to find out what you paid for a stock. You may have to call your accountant to get a copy of your last year's tax return. Or whatever. You may have to guess on some items, because you cannot find the answers anywhere or from anyone. While you may not get 100% of all this stuff together, getting as much as possible is better than doing nothing! To help you with this, we've included two useful items on the following pages.

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We've given you a simple cash flow worksheet to fill out so you can see what you're really spending. While not all of you will want to do this, we think it's critical to know what you're spending. The second item is a checklist of things you may need to collect to get a handle on what you have currently. While these forms are intended to be pretty comprehensive, if you have things not included in them, you of course, can add them in the places marked "Other." If you never do any retirement planning, if you never take any actions to change what you're doing, if you never find out what other options you have available to you, you should at least get a handle on where you are today! Just going through the exercise of getting your information together, seeing what you have and don't have, and knowing where everything is, is worth it inand-of itself. Just having a grasp on what you've accumulated throughout the years is a great thing to know. You'll feel more organized, be more objective, and be in more control. Remember that this isn't an exercise to criticize yourself, or to bring up things you maybe would rather forget. It's simply the time to "take stock," to get an inventory, to see where you are today! We promise you'll be glad you took the time to do this, no matter what you decide to do about the information you gather! So go out to the garage and start opening up those folders. Take a trip to the bank, and get going! We have included several forms at the end of this chapter to help you get organized. These forms ask for most of the data you will need in order to begin the planning process. Your retirement planners can help you complete these forms, if necessary.

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DATA & DOCUMENT CHECKLIST

Note: Check the items applicable to your situation and complete all pertinent information for all family members. If youre not sure what to complete, just complete everything!
APPLICABLE ____________ ____________ ____________ ____________ ____________ OBTAINED ___________ ___________ ___________ ___________ ___________ PERSONAL INFORMATION Family names, birthdays, year(s) in school Social Security numbers Attorneys name, address, phone Tax Preparers name, address, phone Premarital agreements, separation agreements, divorce decrees, wills/codicils trust agreements EMPLOYMENT INFORMATION Last 2 detailed paycheck or pension \ stubs Summary plan descriptions for: Group life insurance Group medical/dental insurance Group disability Pension/profit sharing plan(s) ESOP/stock option plan(s) Thrift/401k plan(s) Deferred compensation plan(s) Tax sheltered annuities/TSAs Account statements (for above plans) Beneficiary designations (for above plans) Annual benefits summary statements

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________

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INDIVIDUAL INSURANCE POLICIES

(including recent premium, loan and dividend statements)

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________

Life Annuities Disability Long-term Care Insurance Hospitalization/major medical Automobile Other property Liability Umbrella
INVESTMENT RECORDS

____________ ____________ ____________ ____________ ____________ ____________

___________ ___________ ___________ ___________ ___________ ___________

____________

___________

Personal financial statement Account statements for: Banks, CDs, (yield & maturity date) Brokerage accounts (purchase prices, Dates purchased, splits, etc.) Mutual fund/dividend reinvest accounts IRA/Keogh/Pension accounts Partnership Agreements Loan & mortgage agreements (balances, original amounts, interest rates, terms payments) Savings Bonds Prospectus/offering memoranda Transaction confirmations, correspondence/K-1s Personal property values (furniture, autos, misc,) IRA/Keogh plan description (5500s) Real estate (original cost, market value, Date acquired, original mortgage amount, mortgage term, interest rate, taxes, payment) Real estate rental properties (same as above plus rents, expenses & insurance policies)

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____________ ____________ ____________ ____________

___________ ___________ ___________ ___________

TAX RETURNS Federal & state income tax for last 3 years Federal gift tax returns Details on quarterly tax estimates Income & deduction estimated for Current year tax

MISCELLANEOUS
____________ ____________ ____________ ___________ ___________ ___________ Information on present or anticipated inheritances Completed budget worksheet Checkbooks & check registers

BUSINESS OWNERS
____________ ____________ ____________ ____________ ___________ ___________ ___________ ___________ Copies of corporate returns, federal and state Copies of partnership agreements or Articles of Incorporation Copies of latest business financial statements Copies of buy and sell, stock redemption, split dollar and other agreements Value of business and stock or Ownership percentage Qualified, retirement deferred Compensation plan(s), documents & statements Business insurance coverages

____________ ____________

___________ ___________

____________ Notes:

___________

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CASH FLOW WORKSHEET

For: _____________ Date: __________

INCOME MONTHLY ANNUAL --------------------------------------------------------------------------------SALARY (H) ________ ________ SALARY (W) ________ ________ PENSION (H) ________ ________ PENSION (W) ________ ________ SOCIAL SECURITY (H) ________ ________ SOCIAL SECURITY (W) ________ ________ OTHER ________ ________ --------------------------------------------------------------------------------GROSS INCOME ________ ________ --------------------------------------------------------------------------------DEDUCTIONS FOR: FEDERAL TAXES ________ ________ STATE TAXES ________ ________ SOCIAL SECURITY TAXES ________ ________ GROUP BENEFITS ________ ________ OTHER ________ ________ --------------------------------------------------------------------------------TOTAL DEDUCTIONS ________ ________ ---------------------------------------------------------------------------------

FIXED EXPENDITURES:
MORTGAGE OR RENT REAL ESTATE TAXES LIFE INSURANCE HEALTH INSURANCE DISABILITY INS. AUTOMOBILE INS. HOMEOWNERS INS. LIABILITY INSURANCE LONG-TERM CARE INS. ALIMONY/CHILD SUPPORT TUITION/EDUCATION GROCERIES GAS/ELECTRIC/ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

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WATER/ETC. ________ ________ TELEPHONE ________ ________ CAR PAYMENTS ________ ________ OTHER ________ ________ ---------------------------------------------------------------------------------TOTAL FIXED EXPENSES ________ ________ --------------------------------------------------------------------------------DISCRETIONARY EXPENDITURES: CLOTHING/CLEANING ________ ________ MEDICAL/DRUGSTORE/ DENTAL ________ ________ AUTO REPAIR/ MAINTENANCE ________ ________ HOME REPAIR/ MAINTENANCE ________ ________ MEALS OUT/ ENTERTAINMENT ________ ________ GAS/PUBLIC TRANSPORTATION ________ ________ GIFTS FOR RELATIVES ________ ________ VACATIONS/TRAVEL ________ ________ DONATIONS ________ ________ OTHER ________ ________ ---------------------------------------------------------------------------------TOTAL DISC. EXP. ________ ________ ---------------------------------------------------------------------------------TOTAL EXPENDITURES ________ ________ ---------------------------------------------------------------------------------NET SAVING (BORROWING)* ________ ________ ________ ________ *(Gross Income + Deductions) (Total Expenditures) = Net Savings

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Think about it: The first step in financial planning is to know where you are today. Use the Personal Expense Summary to see what you're really spending. Use the Data Sheets to give you an idea of the information that will be required to do a thorough analysis of your situation.

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Chapter 7

GOAL SETTING MADE EASY: HOW TO SET GOALS THAT CAN BE REACHED!

We just finished talking about the first step to proper planning, finding out where you are today. Now we're going to chat about the next part of the equation, setting goals. As we've said, you can't know where you're going if you don't know where you're headed! You can't get to your destination, if you don't know what it is! We know that sounds like kindergarten-type instructions, but it's a big problem for most people, regardless of their station in life! Just like taking a trip, you have to know what your destination is, or you won't be too likely to get there. Let us explain. Most people, retired or not, answer the following question somewhat the same: What Are Your Financial Goals? The answers are usually something like: 1. I want to be rich. 2. I want to be secure. 3. I want to be able to sleep at night. 4. I just want enough money to be able to do what I want to without worrying. 5. I want to live in a beautiful house in a nice neighborhood. 6. I want to send my grandchildren to whatever college they want to go to. 7. I want to be able to travel all over the world. 8. I just want to be self sufficient, and not be a burden to my children. 9. I want a million dollars in the bank. Or whatever. Any of them sound familiar? See, these "goals" are really not financial goals at all. Here's why:

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A financial goal isn't a goal unless it includes specific, measurable, quantifiable amounts of money, and it contains a rational reason for that amount of money! For example, if you say you want to be "rich," that means nothing in reality. What does "rich" mean anyway? To some readers, "rich" means having an income of $100,000 a month. To others, having an income of $4,000 a month would be "rich." It's all relative. Some people say they want a "million dollars" in the bank, when they have no idea if that amount is enough for them to feel "rich." If someone wants to live on $10,000 a month, and has a million dollars in the bank earning 4% interest, he or she will be out of money in about 10 years. Is that rich? What if you are 65 years old, are used to living on $10,000 a month, and all you have is $1 million in the bank, and you are in great health? Are you "rich?" Some people would say you are. You might think you're "poor" because you only have enough money to last until you're 75 based on the life-style you've gotten used to! What if you have the same $1 million and you only need $2,000 a month to live on? Are you "rich" yet? Do you see how variable and subjective these types of "goals" are? Do you see that what may seem like a fortune to one person, may seem like a pauper's sum to another? And, is anyone wrong for thinking one way or the other? If you are used to living on $2,000 a month, and are very comfortable, and a family member lives on $8,000 a month, and thinks living on $2,000 a month is awful...are either of you right or wrong? Of course not. Everyone's entitled to his or her opinions and feelings. Some people may think living in a one-bedroom condo is a "nice house, while others may think a 3-story mansion is a "nice" house.

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The important fact is that calling things a name, putting a label on a life-style is meaningless. To have meaningful goals that can be used as objectives you try to reach, your goals must be calculated on a logical, rational, numbers crunching basis! For example, if you are just about to retire, and you are used to living on $4,000 a month, you cannot tell yourself or your advisors that you want to remain "comfortable" during retirement. That term "comfortable" doesn't mean much. You need to decide how much money you need to live on to feel "comfortable," and then use the dollar amount, adjusted for inflation, as your goal! So, if you feel you can live on $3,500 a month "comfortably," that goal, adjusted for the increase in the cost of living each year, is your goal! If you think inflation should be projected at 4% per year, then all you have to do is use a financial calculator or have a professional advisor show you how much you have to earn on your investment capital, allowing for your pension and Social Security, to have the inflated equivalent of $3,500 a month over your expected life span. Now we've converted a nebulous term like "comfortable," into a meaningful, specific, measurable goal to shoot for! Then, as time goes by, you can monitor your plan, see if your goal is achievable, and make changes to your plan as necessary. Do you see how critical it is to get away from naming your goals, and to instead put hard numbers to those goals? If you want to send kids to school, you have to know how much it costs and for how many years! If you want to live in a beautiful house in a nice neighborhood, how much does the house cost? How much are the taxes and maintenance? And so on. You have to attach numbers to the goals to make them true goals you can shoot for, and measure your progress. So saying you want a "million dollars" now needs to be translated into a real goal. The real goal would be, "I want enough money in the bank to live on $10,000 a month for 25 years, assuming a 4% inflation rate!"

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Now that's a goal. (And the answer, by the way, will be a lot more than a million dollars. If you earned 4% on your money, you'd need $3,064,610 in the bank to do this!) So, when you sit down to work on the second part of planning, setting goals, make sure you think of everything in terms of how much does it cost, instead of describing the "goal" with words. Then you'll be on the right track! If you don't know exactly what you want, that's fine. Try to get a rough idea of what you want and then start with that goal now. If your vision of what you see for yourself gets clearer, then change the goal later on. It's better to have some goals you're working towards, then no goals at all! Finally, we know that setting goals may be hard, because the future can be uncertain. But, uncertainty will be with you, whether you set goals or not. So, if you have plans with specific goals, and your plans or goals change, or if the economy or your life change, you will have to adjust your actions accordingly. Setting goals doesn't guarantee you'll reach them or keep them once you get them. But, having no specific goals assures you'll have a difficult time, at best, reaching them, since you don't have any! So, setting goals is a crucial ingredient to financial success! THINK ABOUT IT... A financial goal isn't a goal unless it includes specific, measurable, quantifiable amounts of money, and it contains a rational reason for that amount of money.

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Chapter 8

HOW MUCH MONEY DO YOU NEED TO RETIRE SO YOU NEVER OUTLIVE YOUR MONEY?

This is a scary question. How much money do you really need to retire? How much money do you really need...so you won't outlive your money? In the old days this question wasn't so difficult. Remember the times when something cost $1 new, and many years later might only cost $1.05? Remember when a buck was a buck? Over the last couple of decades, when rampant inflation has become part of our lives, when a buck isn't even close to a buck...it's a much more difficult question to answer. If you remember, a few chapters ago we talked about Grandma Hannah and how she ran out of money. How the family had to take care of her in her later years? We talked about Grandma Hannah and what she didn't know about inflation. We talked about how the government's inept management has caused inflation. That its deficit spending will continue to cause a built-in inflation that is never going away causing many retirees to literally outlive their money. The increases in lifespan due to dramatic improvements in the health-care system are wonderful. It's great to see people living in their 70s, 80s, 90s, even 100 enjoying excellent health. That's the good news. The bad news is that it takes lots of money to live. Sure, money can't solve all your problems, but no one will disagree with the fact that you need to have some to live on. You need money to pay bills, buy groceries, medicine, take care of yourself and yes, even enough money to have cable TV. Now we've talked about this inflation problem and uncovered the truth about how it affects people. Now we've come to the point where we need to discuss how you plan your finances so that your money won't run out.

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For a lot of people this is a very difficult and complicated question. It becomes complex for people because they don't have any idea what their current expenses are, let alone what their expenses will be in the future with inflation taken into account. Listen to the story of Clara and Bryan. Clara had been a head nurse at a hospital and was about to retire at age 64. Bryan, age 65, had been, a foreman his whole life and belonged to a union since he was a young man. He had some money put away for retirement in the union pension plan, but between the two of them, they really hadn't saved a ton of money. They were quite concerned about their situation because Clara had an older Aunt Joan who was in her upper 80s and was living solely on Social Security and food stamps. Joan wasn't sick and didn't require a nursing home but had nowhere near enough money to take care of her needs. Clara and Bryan were very concerned that this would happen to them. What we told Clara and Bryan and what we're telling you is There are no guarantees. There are no perfect answers. Obviously, no one can really project with 100% accuracy what will happen in the future. But, by the same token, it doesn't mean we can't make a serious attempt to use careful planning and the power of computers to project the future given certain assumptions. We can use sound retirement planning techniques to get a handle on Clara and Bryan's situation today and help them see where they will be in the future...and what to do about it. The real answer is that YOU have to run the numbers. It's basically a question of mathematics. Clara and Bryan had a certain amount of money in the bank, a house, a mortgage, a pension, investment income, and Social Security income, etc. The real job here is to take that information, put it into a computer program, project the rate of inflation, figure out what they will need to live on each month in today's dollars and future dollars, and let the computer tell us what rate of return they need to earn on their money and how long the money will last under different assumptions.

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We don't know any other way to do this. You can't do this with a hand-held calculator. You can't just guess with a pencil and a yellow legal pad. You really need to crunch the numbers and see what the projections tell you. Let's use Clara and Bryan's actual numbers as a case study here to see how their situation looked when they came in, what their initial numbers showed based on what they said they were trying to do. And then we'll look at what we finally recommended they do with the revised plan of action. To start with, their home was worth $255,000 based on comparisons with other home selling prices in the neighborhood. We agreed with them that it was a realistic figure, plus or minus. In reality it doesn't make any difference. Why? Because for a retired couple or an individual who isn't going to sell their home, the actual market value really doesn't make a heck of a lot of difference. If you're not going to sell the home and reposition the money elsewhere to provide income, we don't count it in our calculations. It's nothing more than an asset you own that may go up in value but is really worthless to you from the standpoint of retirement income. It's not unusual for us to have to recommend to retirees that they consider purchasing a smaller house or even renting and then repositioning the equity tied up in their house. And sometimes we look at a reverse mortgage to generate extra income. As you will see in a few minutes, in Clara and Bryan's situation, it was recommended they consider moving to a smaller place because so much of their net worth was tied up in the home. After paying on the mortgage for 25 years, they only had a balance left of $14,500. So they had a lot of money tied up in an asset that really didnt help to produce income. Now, when we talked to them initially, they were asked if they were to find that they needed some of the equity in their home to produce income, would they consider moving to a smaller place or to a different area? Sometimes when we ask this question, people tell us they have no intention of ever moving. It's just not going to happen. Which is fine. That's why we do such extensive and detailed interviews. We need clients to tell us what they are willing to consider, and what they're NOT willing to consider. If we don't know what you really want, what you are willing to change, and what you don't want to change, we can't do a good job helping you.

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So, when we asked Clara and Bryan how they felt about this, they responded that they had talked about maybe getting a condo or townhouse since they didn't need a big house any more. And, they added that if the plan showed them that moving to a smaller place would make a difference in their finances, they would seriously consider it. Here's a summary of what their situation was when they came in to see us: $255,000 house with a $14,500 mortgage left. Equity of $240,500, with a profit of $190,000 over what they paid for the house years ago. $246,788 in CDs, IRA's, savings bonds, savings accounts, mutual funds, etc. A monthly pension of $740 for Bryan and $121 for Clara. A monthly Social Security of $788 for Bryan, and $380 for Clara. A desire to live on the inflated equivalent of $3,000 per month. (Which was about $1,000 a month less than they lived on when they were working.) They were earning a 3% after-tax rate of return on the assets they had invested. (Most of the money was in the bank and in savings bonds and low yielding mutual funds.)

OK. The table and graph on the following pages show that if they just continued to do what they were doing, they would have run out of money at age 78! (See Projection 1) The only way their money would be able to last longer would be to earn a higher rate of return, or to cut back on their life-style and need for income. As you can see from the following table, if they were able to earn 12% on their assets, the money would last well into their nineties - a big difference. But trying to earn 12% would cause them to take risks they werent ready to take. (Projection 2) (That's a pretty healthy rate of return to shoot for and isn't realistic since they said they didn't want to take the risk of losing their principal.)

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Now, when presented with this set of facts, we had a suggestion for them. Sell their house, and use the home sale tax exemption to shelter all their taxable profit on the sale so they would pay no tax. Then, we recommended they pay cash for a home in the $170,000 range they had been looking at, putting an additional $71,000 of cash into their investment pool. (They had told us they had found a town home for $170,000 that was brand new, right near all the kids and grandkids, and would make them happy.) And, because of moving to the smaller home, their monthly expenses would drop about $400, reducing their need to $2,600 a month. As the next chart and graph show, by reducing their monthly income need and adding money to their investment pool, they would still run out of money at age 85 if they kept earning 3%. (Projection 3) But, instead of having to earn 12% or more to make their money last as long as they'll probably live, they would only need to earn 6.5% (a much more realistic rate to attain without taking too much risk) to have their assets last until age 99! (Projection 4) This example is EXACTLY how you have to figure out your ability to make your assets last for your lifetime. There is no other way than using this type of projection to learn what you should do. Of course, these projections aren't any guarantee of how things will turn out. Inflation could be higher or lower than we projected. Their investment returns could be different than those projected. Their need for income could end up being different than they thought. All the assumptions we made when planning could end up being different. So, while there is no guarantee of 100% accuracy with any projection about anything in life... Planning still gives you a "roadmap" to follow. Planning gives you a way to measure your situation and make changes in a calm, business-like manner... instead of making decisions from fear! That's why PLANNING is so crucial. It gives you a path to follow based on realistic assumptions. And, as you monitor your plan every year (or more

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often, if need be), you can adjust and fine tune your moves to keep the plan, and your money, on track! So, yes, this is the only way we know of to have the absolutely best chance of making sure your money lasts until you don't need it any more! Again, PLANNING is the key!

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Think about it ...

It's simply a question of mathematics. Accumulate your documents and numbers. Put the numbers into a computer program. Project the rate of inflation. Factor in the amount of money you will need per month in both today's dollars and future dollars.

The projection results will tell you:

What rate of return you need to earn on your money, and How long the money will last under different assumptions.
PLAN, PLAN, PLAN

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Chapter 9

THE BIGGEST MISTAKES RETIREES MAKE AND HOW TO AVOID THEM

Over the years, weve spent countless hours working with retirees and preretirees. Weve seen just about everything. We've seen people who have wonderful, secure retirements and have done many things right. We've also seen many people who have not-so-wonderful retirements and have done lots of things wrong. Please understand that this is not criticism. It's not our place to criticize. What we are trying to do is show you how easy it is to get messed up with your retirement planning and point out some of the most common mistakes people make so you won't make them yourself. Many people wonder how can so many retirees can be in such a fix? If its such a problem, our country would really be in big trouble with retirees everywhere who were suffering financially. The answer is, it is true, it is a problem --there are many retirees suffering financially, and as the Baby Boom Generation ages, retirees will become this countrys largest financial problem of all! So, with that said, we want to make sure you understand everything you need to know to plan properly for your own retirement. When you finish this book and start your retirement planning, you will be well ahead of your peers. Now, let's talk about the biggest mistakes retirees make and how to avoid them. Do you know if your retirement money will really last and provide you the life-style you want? The only way to be sure is to avoid making any of the ten biggest mistakes people make when they retire! It's frightening when you think about it, but your retirement doesn't leave too much room for mistakes of any kind.

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Right? It's kind of like building a house. The contractor doesn't have more than an inch or two of room for error. If they're off by more than that, the house may not stand up. As big as a house is, there exists only the tiniest margin to be off from the plans. And, the same situation occurs with your retirement. Your retirement is not any different than a house. It has to have a foundation. It has to have walls that won't come crashing down around you. It is a thing that you must have working for you, 24 hours a day, seven days a week, 365 days a year, year in and year out! In other words, your retirement cannot be "built" by the seat of your pants, it must be: Safe, Secure, And On A Solid Foundation! Let us share a quick story with you, to illustrate some of the mistakes we mentioned a few minutes ago, and then we'll discuss them in more detail. Perry sat in a sort of stunned silence. His wife Edie, fidgeted with her purse that was sitting on the edge of the desk of their accountant, Bob. Bob was struggling to find some words to comfort them, but just didn't seem to be able to find the right ones. He did manage to say, "Well, I know this is a shock, but I promise I'll do everything I can to make it easier for you." He knew his words rang hollow on Perry and Edie. The silence of a few seconds seemed like an eternity to Bob. Finally, Perry spoke up. "But Bob, I don't understand how this could be legal. I mean, it's our money. Why don't we have the right to do what we want with it? It seems so unfair!" His voice started to rise in a more angry tone. "Why should we be forced to withdraw money out of our own IRAs when we don't want to? It's our money, not the government's..." Edie was the next person to speak. "You know Bob, Perry is right. We've worked for all those years, paid all those taxes, raised a family, and, well, it just makes no sense. How can we be penalized for keeping our own money nice and safe in the bank? How can they make us take our own money out and then get stuck paying taxes when we don't need to use the money now?"

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Bob tried to answer both of them. He looked down over the top of his glasses and sipped on his Styrofoam cup of coffee. After swallowing his coffee, he answered, "Well, I know that these kind of laws make no sense, but there really isn't anything we can do about it now. If you had been my clients before, I would have told you about this three years ago, and we could have avoided the whole thing. Im really sorry." Perry then asked, "What about the bank? Why didn't they tell us? Aren't they required to inform people about this ridiculous penalty? Are all their customers getting nailed the way we are? How were we supposed to know?" Bob responded. "I don't know what happened, to be honest with you. When I called Carol over at the bank, she said they have a policy of sending out notices to their customers in the year they are turning 70 so they don't forget about this. I guess they never got your change of address entered into their computer or something, and your forwarding notice expired from the post office." "That's not good enough!" Edie stammered. "It's just not fair. How were we supposed to know....," her voice trailed off in sadness. "Well, Perry. Let's go. It doesn't seem that anything is going to happen to change this. Bob here says that we messed up, and even though we had no knowledge of this stupid law, we're stuck. Is that about the size of it Bob?" Bob nodded his head in agreement as he sipped his coffee. He put the cup down, grabbed their IRS notices in a pile, and straightened them out by bouncing the bottoms of the paper on the top of his desk. He then asked, "Would you like me to try another letter to the IRS? I will, but I don't think it will make any difference. And, you know that the penalties and interest keep mounting every day until they get the money from you. Perry stood up and pushed his chair back from the desk. Edie did the same. Perry looked at Edie and said, "I don't think we should waste any more of either Bob's or our time, do you? Let's face it, the longer we wait to pay, the more it's going to cost us. I don't know, we might as well get it over with and write them their dang check!" Edie closed her purse after putting away her reading glasses. She said, "I guess you're right, honey. If the IRS has nothing better to do than punish 74-year old people, then I guess we're just going to have to live with it." She then turned to Bob and asked, "How much is the total with all the interest and everything?"

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Bob looked at the top sheet in the pile of correspondence and replied, Well, if we get the check to them by next Tuesday, there won't be any more interest than is already on top of the penalties. The total is $17,657.23." He almost choked on the words as they came out of his mouth. Then he added, "Plus, we'll have to have you make a withdrawal from both IRAs of, let's see, Perry, you need to withdraw $9,988, and Edie, uh, you have to get $6,567 out of yours." Bob continued, "Now remember, you'll have to set aside about 35% of these withdrawals to cover the federal and state taxes that will be due next year. You'll also have to make estimated payments on the 15th, and Ill explain how to do that before then." Perry and Edie picked up their stuff and shook Bob's hand. Perry mumbled some sort of thanks as he and Edie turned to leave the office. As Perry held the door open for Edie, she turned to him and said, "We'll get through this. I know we will." Perry let the door close behind him and put his arm around Edie as he replied, "I know honey. We will get through this, but I am so mad at that bank..." Edie cut him off and said, "Perry, it's not the bank's fault. It's ours. We should have known..." Now it was Perry's turn to cut Edie off. "How the heck were we supposed to know that you have to withdraw certain amounts out of your IRA? Bill, the genius accountant, never told us. The bank never told us. No one told us except the IRS agent!" Perry stopped talking because he was going over the same angry path he'd been on many times before. A path that let him get his anger out, but didn't change their tax bill a cent. This sad but true story demonstrates how retirees are constantly at risk to see their retirement security and peace of mind diminish or disappear. The world is a much tougher and unforgiving place than it was years ago. There are so many things to know. So many rules and regulations. So many pitfalls and traps. Inflation, the tax man and the crazy up and down stock market are always lurking out there, waiting to gobble up more of your estate. Then there's the kids, or grandchildren, and their demands on your resources.

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There's a lot to deal with. And, let's face it. Who has the time to sit and read every tax law, investment option, insurance issue, and so forth. And, even if you had the time to read all this stuff, would you really understand what it means? That's why we have included this chapter. We wanted you to have an easy to understand set of facts, that cut right through all the baloney, and tell you the biggest mistakes retirees make...and more importantly, how to avoid them! You Need To Know How To Avoid The Traps That Are Out There! So let's get into these important issues, and see if you're making any (or all) of these mistakes! Listening To The Wrong People! It never ceases to amaze us how many people take advice on their retirement from people who are totally unqualified to give this critical advice! For example, when we see retirement messes (which we see everyday) and we ask where they got this information that has messed them up so badly, we inevitably hear things like: My brother-in-law told me to do that. He used to be an accountant at Westrand Corporation, you know!" I asked the guy whose office was next to mine for all these years. I figured he must know what he's doing since he's friends with the boss." "I read an article by June Brant Queen in Newstime , that said all retirees should do..." And so on. Everyone's got an opinion about what you should do with your retirement.

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Unfortunately, just because they are your relative or are involved in some area of finance unrelated to retirement planning (like the person at the bank who takes applications for checking accounts and CDs) or write articles for national magazines, doesn't mean they know the answers to YOUR retirement problems and questions. We cannot stress enough how important it is for you to work with a specialist in retirement planning that knows this area backwards and forwards. After all, how many times are you going to retire? Shouldn't you be sure that the advice you're getting is right for you and not generic or just plain wrong? Be sure to find a retirement specialist just like you would look for a cardiologist if you had a heart problem. Would you ask your brother-in-law to analyze your angiogram? If not, why would you ask him to analyze your entire financial situation? It just doesnt make a lot of sense! 2. Choosing The Wrong Pension Option! Let me illustrate this mistake with a real life example. The client, Lou, had retired a few years ago from a large equipment manufacturing company. His wife, Janet, had not worked outside the home and had no pension of her own. When Lou left the company, he was given a range of choices of how to handle his pension payout if he were to die before Janet. The choices were quite confusing, and they both decided to take the higher payout now, counting on the life insurance Lou had to cover Janet if he died. (With the help of Janet's sister's husband, who used to be an accountant, of course.) Anyway, Lou died just one year after retirement in a tragic accident. Janet was left with no pension income, but did get Lou's life insurance proceeds.

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She Had To Go To Work, Because She Outlived Her Retirement Money! In a matter of only four years, Janet had to get a job because the amount of life insurance money was way too low for her needs. See, what seemed to be a fortune to them wasnt really a fortune any more. What did they do wrong? They made a critical decision like this from the seat of their pants, without having someone prepare a detailed financial projection of which option would best meet their needs, before making the irrevocable election. If Lou and Janet had done this, she would be receiving a much higher income and have the insurance proceeds to boot. Now, does this mean that all retirees should take the lower payouts and have the survivor get some sort of payout? No, not at all. There is no such thing as any strategy that applies to some or all retirees. Your situation is your situation. It is as unique as your fingerprints. And just like no two fingerprints are alike, no two retirements are alike. Please promise us you'll not take "canned" advice, particularly when it comes to monumental decisions like choosing a retirement payout. 3. Misunderstanding What Medicare And Social Security Do And Don't Pay For! We see it all the time. One spouse told us how shocked she was when she learned that the $3,500 a month nursing home expense for her very ill spouse wasnt covered by Medicare or Social Security. "But I thought Medicare covered medical expenses!" she exclaimed. The Government Is Not Going To Take Care Of You!

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Yes, Medicare does cover medical expenses. But, it only covers certain ones, and only after you have paid a deductible. Many, many medical expenses aren't covered by Medicare and are usually picked up by a Medicare Supplement policy. But, those supplements still don't cover extended nursing home care. Not a penny. Zilch. (Except for up to 100 days of skilled care which very few retirees get because of all the red tape. But, even if you DO get this 100 day Medicare payment, what happens to you on day 101?) Here again, we have an unplanned-for situation that can literally wipe out a family's retirement nest egg; a situation that nine out of ten retirees don't have a clue about! (By the way, as we've discussed elsewhere, did you know that in order to qualify for state support from Medicaid, you literally have to spend your net worth down to nearly zero first? This is not a solution that we recommend you implement!) Don't make the mistake of thinking that Medicare or Social Security is going to take care of you. They don't! Sure, they cover many things, but there are still huge, gigantic gaps they won't take care of if you don't plan for yourself. You must know what the government does help you with and what they don't help you with. And, you must have a plan to address the exposed areas that could cause your family some real problems! 4. Not Understanding The Tax Rules For IRAs. Pensions. Income. Etc.! Remember our friends, Perry and Edie, who found out too late that the IRS demands you remove certain amounts out of your IRA? Remember how devastated they were with all the penalties and interest they got stuck with? And, remember how aggravated they were that no one told them about it, yet they still got stung big time? Well, their story is just one of many problems that retirees run into because of a lack of the proper knowledge about qualified retirement plans. "Uncle Sam" Is A Relative You Should Try To Give As Little As Possible To!

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How much should you withdraw from the plans? When should you withdraw from the plans? Should you let that money sit, use other money to live off and pay bills? Or, should you take a withdrawal from your IRA to pay off your car so you'll have lower monthly payments? Or, how should your beneficiaries be named in order to minimize their taxes in light of IRS regulations? Or, should you stop working at a certain time to collect Social Security now? Or, should you wait to apply? Or, should you work part time? And, how does that affect your Social Security payments? What about the taxes on your Social Security income? Are there legal and safe ways to reduce it? Or, what about the taxes on the interest on your CDs? Is there a better way to invest to reduce those taxes? Or,. We think you get our point. There are literally dozens and dozens of tax decisions you must make, whether you want to deal with them or not. Let's think about a simple example here. If you were to save $200 a month in taxes, simply by knowing the laws and how to legally reduce your taxes, that's $2,400 a year that you didn't have before. What could you do with an extra $2,400? What about saving even more? People do it all the time. Could You Use A Few Hundred Dollars Extra Each Month? If you want to make sure your income, estate and gift taxes are as low as legally possible, you need to work with a qualified retirement planner who can

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lay out all your options for you allowing you to make an informed decision as opposed to an emotional decision. Or worse, not even knowing you had to make a decision, like Perry and Edie who found out the hard way. Now, you may be thinking, well, I know about the required withdrawals and all that. And that's fine. But, what don't you know, that someone else knows? When it comes to tax planning, there is little room for making mistakes. Don't try to know it all yourself or depend on others who don't study these things every single day for a living! (Did you know that each and every year, there are hundreds of tax rule changes? Some of them don't affect you and others do!) So don't play tax roulette and hope your numbers hit. Make sure you are as sensible about your tax planning as you are about your health! 5. Not Knowing How Inflation Destroys Your Money. And Not Taking Actions To Prevent It From Leaving You Broke! While we won't repeat the whole inflation discussion here, because we've covered it in great detail in other chapters, we still have to add it to the list of the biggest mistakes retirees make. There are two things you MUST understand about inflation: 1. It's always going to be with us. 2. If you don't plan properly, and set yourself up to handle the decrease in the value of your money because of inflation, you will have a very good chance of going broke! We're not trying to scare you. We're only telling you the truth.. The increasing costs of running our government almost guarantee that we will continue to have to live with increased costs in our personal lives.

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Higher taxes, higher living expenses, higher costs of medical care, higher -EVERYTHING! You cannot stick your head in the sand and pretend that inflation is licked and not a problem. The government says that since inflation is only 3-4%, it's not too bad. First of all, as we mentioned, we seriously doubt the government's statistics on inflation as being applicable for the average family or retiree. Second, even if 4% was the correct figure, your cost of living would DOUBLE IN 18 YEARS! If inflation runs at 6%, your costs would DOUBLE IN 12 YEARS! And, if we return to late 70's type of inflation of 12%, your costs would DOUBLE IN ONLY SIX YEARS! Remember, even "low"' inflation...is bad inflation. So, dont let the monster of inflation eat you alive. 6. Thinking "Risk" Just Involves Losing Principal! Here is a big mistake we deal with almost every day and have covered in the chapter on investments. We're repeating it here since it is so critical to your wealth. A client that's either planning for, or already is, retired, will say something like, "We don't want to take any `risk' with our retirement funds! We want them to be totally safe and free of risk'!" (Have you ever thought that yourself?) There's More Risk In "Riskless" Investments Than You May Think! Let's discuss what the definition of "risk" is, in the first place. If you look it up in the dictionary, you'll see that it is defined as: "A chance of encountering a loss or harm, a hazard or danger." Now, you'll notice it doesn't say "loss of principal." It is defined as "loss." This is a major distinction we need to make here.

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Most retirees think "risk" means that you put your investments somewhere and the $100,000 you started with is now worth far less than$ I00,000. And yes, this is one type of risk...and a real one at that! But it is only one type of risk. There are others that are just as scary and that can hurt you just as badly as losing principal. By the way, if we told you that you are actually losing real money in the bank, would you believe us? Would you think we were lying, because CDs are insured by the FDIC? We guess this is the time to explain what we mean. If you are making 5% interest on a CD, and you are in the 28% tax bracket, your net, after-tax yield is only 3.6%! A 5.00% yield x 28% tax = 1.40% lost to taxes 3.60% net after-tax yield. Now, that would be bad enough, but we cannot forget our nemesis, inflation. Yes, they claim inflation has been licked. That it's gone. Why? Because it's been hovering around 3-4% for the last couple of years. And that is considered low by today's standards. But, did you know that in the early `70's, when President Nixon instituted price controls, inflation was an incredibly high 4%! Isn't that interesting? In 1972, 4% inflation was considered so high that the government tried putting price controls in place. Now, when inflation is at the same exact level 30 years later, it's considered insignificant. How can this be? Could it be that inflation has changed, or is it possible that the government has changed the way they want us to view it? How does this "not so bad" inflation affect our CD? Losing Money On Riskless Investments Is Very Real! Well, remember that we're at 3.6% net, after-tax yield. Now let's subtract inflation from this yield to arrive at your true change in value, adjusted for the loss of purchasing power:

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3.60% net, after-tax yield - 4.00% inflation (0.40%) True return Those brackets, by the way, mean a negative real rate of return! Yes, that means that you have a loss of value of $40 for each $10,000 you have invested in CDs in our example. Now, if we asked you to put money in an investment that was guaranteed to lose $40 for each $10,000 you invested, you'd run away faster than a deer from a lion. Yet, if you have CDs, then you could be doing the exact same thing! So, what does a retiree do to get a better return and avoid the higher tax on their Social Security and other income? As we said a couple of minutes ago, the real secret is to know what items you can invest in that are off of the "tax hit list." What you need to do is figure out how much monthly income you need, and then build a plan that uses the tax favored savings to assure you get the cash flow you need, and avoid wasting money on the taxes you don't need, with assets that have some chance to keep up with inflation. See, the risk we're talking about here is the risk of losing purchasing power. This risk is so profound, yet almost totally ignored by most retirees. That is until it's too late! The only way to insure you won't run out of money is to have a plan that both meets your income needs and provides the opportunity to keep up with inflation. Now, no one is suggesting you not keep a portion of your money in CDs or other guaranteed programs, because it would be foolish not to. But, by the same token, having too much money in these types of investments can insure you have a high risk of running out of money! No one wants to outlive their money.

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Misunderstanding the risk of the loss of purchasing power is a mistake you do not want to make. 7. Paying For The Wrong Kinds And Wrong Amounts Of Insurance! For some reason, when people are retired, many of them hang on to old insurance coverage of all types, just because they've had them for a long time and are reluctant to change. We're not sure why, but it seems to be the case more often than not. Listen, when you are in retirement, you have little extra room in your budget to waste money on needless coverage, or to be shortchanging yourself on coverage you do need. Many of our retired clients find they can get more coverage in the areas they do need and eliminate or reduce coverage on stuff they don't need and save hundreds or thousands of dollars in the process! We recently saw a couple in their late 60's, who were paying over $2,100 a year for coverage they didn't need, and had no insurance at all on things that they really should have in place. By repositioning their insurance portfolio, we showed them how to buy what they needed at less cost. The net bottom line is that they have an excellent group of coverage for just about anything that could go wrong and can save $123 a month to spend and have fun! No one wants you to be insurance poor, and we also don't want you wasting money on things you truly don't need, either! The only answer is to have someone objectively review your insurance and find out what's wrong and what's right! 8. Planning For Your Retirement When You Are Already Retired! This mistake is one that we see over and over again. People getting laid off from a job they've had for years. Or taking advantage of an early retirement program offered by companies trying to shrink their payrolls.

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Or, people taking normal retirement at age 65. Or, whatever reason. We have people coming in constantly asking the same question: "Will we have enough money to make it all the way with the same lifestyle? This is a big mistake! Why? Because they have already made all their decisions. They have already taken their retirement plans and either had them distributed, or are receiving monthly payouts. They have made all their choices, and want us to tell them they're going to be OK. In some cases they will be. And in some cases they wont if they continue on their original path. Of course, things may seem alright now, but they havent peered down the road twenty years to see the consequences of their decisions. If we're making any sense to you, you'll see that waiting until you reach a certain age to plan for that same age usually doesn't work. We have folks that came to us under these circumstances, and we have the unpleasant job of telling them unless they modify their current plans, they will be out of money somewhere down the road. Their response, occasionally, is to fire us because we brought them the bad news. (They chopped off the head of the messenger!) They were going to find themselves in the same position as Grandma Hannah. So, if you're not yet retired, do some detailed planning right NOW! Don't wait until you are retired to start. Now, if you have already retired, it's never too late to start planning. Which brings us to the most important mistake of all to avoid: 9. Not Doing Consistent, Careful Ongoing Planning!

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Yes, planning is the single, most effective technique to have a safe and secure retirement! The reason most of us aren't going to win the retirement game is that we don't follow this crucial sequence when it comes to managing our finances: Figure out where you are today. Figure out where you want to be. Get a true understanding of the options you have available to you. (Not from biased sources.) Develop a plan that will provide the right" course" to follow. Make the changes necessary to get the plan going. Monitor your progress, and make the proper adjustments to keep the plan "on course."

Makes a lot of sense, doesn't it? Kind of the same process you go through every day when planning a trip to the mall or taking the kids to practice or going on vacation, etc. Can you imagine how you could get through your daily life without following a sequence of events? Could you imagine how messed up you'd be if you didn't know where you lived; what time your meetings were; didn't know which roads led to the recreation center; didn't know where the meeting was going to be held; and finally, didn't know which room the meeting was in? We know that sounds stupid, because in our day-to-day activities we always know all those things! But, can you really say the same thing about your money? Do you truly know where you are today? (Financially speaking?) Are you certain you have specific goals of where you want to be financially and when you want to be there? Can you say that you know all the choices you have available to you? Have you set up a plan to get where you want to be? Or, like most folks, are you winging it as you go along???

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In helping people win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme. It's not their age, occupation, sex, or income. No. The one common attribute is that they make a constant effort to plan their future. That's it. It may not sound very exotic or romantic. But it's simple and it works. You know, usually, the most effective things in life are the most simple and basic. Make sense? We hope so because this topic is very important to us and to you. It's important to us, because its our careers to help people plan for retirement. It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want in your golden years! So keep these mistakes in mind as you think about your retirement, your security, and your peace of mind! We want you to be aware of the fact that making mistakes in some things aren't so bad, because you have time to recover. If you're 35, and make a mistake with investing, you have plenty of time to regroup. If you're 75, the same mistake can be deadly As we said before, you only retire once. (In most cases.) So, you have to be very, very careful...and plan, plan, plan! Think about it. The biggest mistake retirees make are: Listening to the wrong people. Choosing the wrong pension option. Misunderstanding what Medicare and Social Security do and do not pay for. Not understanding the tax rules for IRAs, pensions, 401(k)s, etc. Not knowing how inflation destroys your money, and not taking actions to prevent it from leaving you broke.

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Thinking "risk" just involves losing principal. Paying for the wrong kinds and wrong amounts of insurance. Planning for your retirement when you are already retired. Not doing consistent, careful, ongoing planning.

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Chapter 10

HOW TO PROTECT YOUR ASSETS FROM BEING TAKEN AWAY IF YOU OR A LOVED ONE NEEDS LONG-TERM MEDICAL CARE!

As sad as it may be, here's a dose of reality for you: If you or a loved one find yourselves in need of long term medical care, the government will do all that it can to first have YOU pay every single dime that you can, out of YOUR pocket, before they step into "help." If you're like most average Americans, you probably think you've done a pretty good job at socking away some cash for emergency use or to have fun with when you retire. Now, upon reading this book, you may have realized some mistakes you've made in planning your financial future. That's okay. Chances are you can still make some changes and achieve a better outcome. But you need to dispel some myths. One of the biggest myths among retirees is...'Ive got a few investments stashed away in case of an emergency...We'll be just fine if anything suddenly comes up!" Short of begging you to please alter this misconception right away, let's share an example of what happened to one family. Judy's husband was an alcoholic. After getting fired from his executive position he had held for close to thirty years, Glen had to be checked into a care facility. He was only three years away from retirement. We'll make a long and heart-wrenching story short. Glen had more than a problem with alcohol -- he also underwent heart surgery, was being treated for diabetes, given daily enzymes for his liver condition, and treated for severe depression. (As horrifying as it was to his wife and family, they felt helpless and couldn't do a darn thing as this once strong and vibrant man diminished in front of their eyes.)

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His devastating health condition wasn't the only problem Judy's family faced. She also had bills piling so high, they could be stacked to the moon and back. She couldn't figure out how to pay the astronomical medical expenses. See, Glen had been fired, so there went their chances of collecting his full pension and other benefits. However, up to this point they still had medical insurance to cover his expenses for awhile. Throughout the years, they thought they had been really smart and put aside a bit of money in their savings account. They had a few CDs, their IRAs and a few other minor investments. But as fate would have it, these finances were wiped out. Now reality hit them hard. They Never Thought They'd Need Long-Term Care! Just like so many other folks out there, they thought they were immune from needing long-term care. And since they wrongfully believed it "only happened to other people," they neglected to calculate the long-term care risk into their retirement planning! Glen had to be admitted permanently into a nursing home after his many lengthy stays at various hospitals and treatment centers. His body had gone into shock from all the surgeries, medications, and the overall effects of "drying out" from alcohol. Four years later, Glen passed away. Their funds had been completely exhausted from paying the long-term care expenses. Judy even had to take out a loan from her sister to pay for Glen's funeral. So let's take a look at how their plan of just "stashing away" some money failed them. When Judy was fighting her battle with the medical bills, she tried what she thought was every avenue of getting some financial help. And she was consistently denied. Believe it or not (and you had better believe it!), government aid was denied because Judy and Glen did not seem "needy!"

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The government's calculations of their CDs, IRAs, their home, Judy's 401 (k), and the other miscellaneous investments disqualified them for government financial assistance. The ONLY fortunate thing in their situation was that Glen was a retired Veteran. This gave them a small amount of financial help, but that was it. While many medical bills were covered by health insurance, others weren't, and Judy had to begin the process of cleaning out all of their savings, assets and investments. Then, when Glen went into the nursing home, Judy discovered that only the first 100 days of Glen's care were covered by Medicare -- and only the actual medical expenses. The costs associated with custodial care weren't covered at all. Medicaid didn't kick in until Judy had gone through a large portion of their retirement nest egg. She was allowed to keep some equity in her house, but nearly everything else was wiped out. She eventually had to sell the house and give half the proceeds to Medicaid anyway! (Every state has its own rules on what a spouse can retain.) With the half that was left, she bought a small condo and had to rely on her kids for financial help. By the time this ordeal was over, and because Judy and Glen hadn't thought of "protecting their assets," Judy was left with virtually NOTHING! You DON'T Have To Let This Happen To YOU! You, just like Glen and Judy, have the opportunity to make financial decisions to help prevent this. You have the opportunity to make sure you don't lose everything to pay for long-term care. The risk of long-term care is a reality for everyone. No one is special or immune from falling ill and requiring long- term care. We understand that most people don't like to think about this (remember how upsetting it was to write up your will?). Most of us like to pretend that we'll live forever and prefer not to think of doom and gloom. And to be honest, we wish we could really live in that dream world, too! But the harsh reality is that it can happen. In fact, government statistics say that once we reach age 65, we have a 43% chance of going into a nursing home sometime during our lives. And since the average American loses most of their

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assets if they go into a nursing home, that may mean you have a 43% chance of losing everything youve got. So, you have to be prepared. You don't have to be like Judy and Glen and watch your hard work and earnings disappear practically overnight. If you want to be a smart planner and skillfully prepare for your retirement (which we assume, since you're reading this book), then you also have to Plan In Order To Keep Your Hard-Earned Assets... Just remember the two aspects of planning:

1) Plan and structure your financial portfolio for a secure and peaceful
retirement; and,

2) Plan and structure your financial portfolio to be protected from

catastrophic and unforeseen expenses. These two points are the foundation and essence of any sound retirement plan. The last thing we want to see happen to you is to take the first step in planning your retirement so that it is secure and peaceful, and then lose it all because you failed to take the second step to protect yourself. See, if you fail to plan the latter, you'll end up like Judy. She didn't seek the help to make the right decisions and failed at the most critical part of it all...protecting what she had socked away from being taken to pay for the enormous long-term care expenses. If your assets are just sitting there, without a coat of armor around them to shield them ...you are vulnerable. Your assets are like sitting ducks waiting to be blown out of the water before you know what happened! We hope you are getting the picture here about how important it is to not only plan your retirement skillfully and intelligently, but also to protect it once you've done the planning. The last thing we want to do in this book is get statistically dry and boring...so please bear with us through this next section.

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There's some important data and information out there that anyone and everyone who ever plans on retiring should know! (We'll try our best to keep it interesting.) Do you know the answers to these questions? 1. Why should we worry about nursing homes? First of all, according to The New England Journal of Medicine Of people who recently turned 65 years of age, 43% will enter a nursing home before they die.. More than half of those people will spend at least a year there, and almost a quarter will spend at least five years of their lives there. Now, do you think it's valid for us to worry about nursing homes since nearly half of us will end up in one? We think so! And, do you think since the cost of nursing homes is rising at 9.8% every year, that we should be concerned? You bet! And, at the time we are writing this book, it costs an average of $3,000-5,000 per month for nursing home expenses. Where will this money will come from? Another very good reason to worry about nursing homes and their attached expenses is that life expectancies continue to increase with only modest adjustments to Social Security, while Medicare or other benefits that help support the aged are being reduced. In fact, instead of increasing the help our elderly desperately need most of these benefits are being cut back. Let's enlighten you on how our health care system has become so screwed up. Decades ago, our government planned for such things as health care costs. Great, but back then, the average age for retirement was 65, with an average life expectancy of only 62 years. Yes, the government is sometimes smarter than we give them credit for. This was a pretty neat little trick, wouldn't you say? The government collected all sorts of Social Security and Medicare dollars from us --dollars headed for a fund that didn't need to be used! They were covered -- we passed away before we could take advantage of their "plan!" (On average, of course, not everyone died at 62, but the government works on averages.)

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We've come a long, long way in terms of health care since this system was first established. And, in turn, here's what's happened. Today people are living longer, retiring earlier, inflation is constantly on the rise -- tapping into and wiping out the barely existent funds supposedly set aside for us! We're depending on a source of revenue that simply is not readily available for us to use. The government, for years and years, has collected tax dollars from us to go into these funds. But, did those dollars really go into that fund? Not a chance. As soon as it went in, it went out. We've paid for all sorts of things, but certainly not our financial futures. Many of the government programs are running at a deficit. The nice little nest egg funded from our tax dollars and designed to be there when we hit retirement... IS NOT THERE! Now, in the near future we're at the brink of Social Security and Medicare going bankrupt. This leads us to our next question... 2. Who in the heck pays for nursing homes if the government hasn't appropriately set up the health care system and funds to help us out? You now probably know the answer to this one... YOU DO! You and you alone will be responsible for paying for long-term care nursing home expenses. While the government doesn't want to talk about it, it requires people lose almost everything they have before kicking in with Medicaid payments. You CAN lose some or ALL of the equity in your home! You CAN be forced to sign over your Social Security checks and pension checks to the state! You can be forced to sell your property, everything you spent your whole life working for! Already over 40% of all nursing home and medical bills are paid by individuals.

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Are you prepared to pay $4,000 a month today, or the expected $9,500 a month it will cost in less than a decade? If you're like most Americans... the answer is "No!" It doesn't matter if you're rich and famous or living off a low fixed income, we don't know many people who can easily drop thousands of dollars each month into nursing home expenditures. Even if you had loads of money, wouldn't you rather see it earn a large return for you to enjoy or pass on to your heirs? So, since chances are you'd rather come up with a better way to pay for longterm care rather than having your own assets wiped out, let's examine Medicaid and its uses. The first thing to always remember is that Medicaid will NOT help you out with nursing home expenses until you run almost completely out of money. That means, all your sources of income must be exhausted (that means anything you own including your car, home, pension plans, investments and so forth) before Medicaid will kick in to help you. Do you see the importance here? To make sure this point doesn't slip by, here it is again: More than likely you will not be eligible for any of the government's financial assistance programs for nursing (that you've been paying for all of your working life) home care until most or all of your assets are wiped out! There, we hope that hit home! So, to answer our initial question of who pays for nursing home costs...the answer is YOU. Medicare does NOT pay the bill, as most people think. In the real world, Medicare covers very little of Americas nursing home bills. Let's repeat. MEDICARE COVERS VERY LITTLE OF AMERICAS NURSING HOME BILLS!

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It's shocking, as well as upsetting, to know that most people mistakenly believe that Medicare will pay the entire amount. But, this has never been the case, and it will NEVER be the case (unless some magic wand is waved over our health care system -- which is totally unrealistic). In the best situation, Medicare will only pay the first 100 days of a nursing home stay. But in many situations, it won't even pay that. And, Medicaid only kicks in when you are BROKE, and your assets are depleted! In fact, did you know that in most states you won't qualify for Medicaid until you own less than $2,000? So, you have to be almost completely wiped out before you're even considered eligible. IRAs, pensions, and insurance - no asset is totally exempt. So here's the deal: If you are incredibly fortunate, you may have a 100-day window of opportunity for Medicare to help pay the costs. But what are you supposed to do after the 100 days is up? The government doesn't care what you do, as long as you pay. That means you may have to close out every account, wipe out any savings, and cash out all of your investments to help cover the bills. We know this is difficult for some of you to handle; the thought is very upsetting. Either we have to hope some magic cure is cooked up during the first 100 days to make yourself or your loved one miraculously better. Or, after the 100 days, you have to start selling nearly everything you own. This is extremely important since the average nursing home stay is about 2.5 years. It isn't until you are left with less than $2,000 to your name before most government assistance becomes available! We apologize for being blunt, but we must be realistic. The good news is that you can do something about it! Even though we are educating you with the not-so-pretty facts, please keep in mind that you can save yourself from most, if not all this trauma that many people face!

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It all boils down to proper planning and bullet-proofing your assets from being pulled out from under you. Remember its not until you are flat broke that you are eligible for assistance! So, dont put this off! If you delay, waiting for the "right time," you'll miss your narrow window of opportunity that's awaiting you right now. You must protect your assets and estate properly, right now while you can! 3. What exactly is Medicaid? If you look up the word "Medicaid" in the dictionary, Webster defines it as "a federal and state program of medical insurance for persons with very low incomes." And the definition of "Medicare", according to Webster is "a government program of medical insurance for aged or disabled persons." Simply put, Medicaid is a government-funded program that will pay for your long-term care expenses in a nursing home -- after you are broke. Currently, Medicaid is a federal program administered by the state. The federal rules apply, or the state will lose its funding. We expect this to change, however. We think the states will end up with "block grants" which is a chunk of money paid to each state, with the state determining how the money will be spent. The state will have control over who gets Medicaid, how much they get, and so on. The government has simply not updated the Medicaid health care system appropriately since its origin and it is seriously outdated for todays times. Because the government failed to update the original health care system and make changes to it as the populous changed, we are now facing bankrupt health care funds! It doesn't take a brain surgeon to figure out why our headlines are screaming out to us, practically daily, about our under-funded health care plans. Everyone knows that the government programs are losing money, but most politicians are afraid of changing it. None of them want to be the one known as

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the one who killed Social Security; that doesn't go over very well at re-election time. And now that we are living longer and retiring earlier, we are wiping out an antiquated system that can't handle the demand! Do yourself a favor and wipe out the notion of this "help for the elderly and disabled" from your mind as if it never existed! That way, you'll be forced to do some of your OWN planning to cover your medical and nursing home expenses in your retirement years. You have to take the bull by the horns and set yourself up to be financially self-sufficient and reliant. Believe us, you'll be far better off than if you continue to believe in the myth that Medicare and Medicaid will be there to help you out when you need it! The bottom line is this: Plan your own financial future with a cushion to absorb nursing home costs, because YOU'LL be responsible for paying them. And, while you're at it, be sure to legally, skillfully and creatively protect your assets from being used to pay for these expenses. Remember, if you're single and have anything above $2,000 to your name, the government won't help you out! Ask the right questions, seek professional help and you can make the right decisions! Planning is the only sure way to take care of yourself and your family, regardless of what goes on with the health care mess. 4. What are your planning options? Well, under the new laws, you really only have very limited options to pay for nursing home expenses: Use your own assets. You can use your cash, stocks, IRA's, home, etc., to pay for a nursing home stay. Transfer assets out of your estate more than 3 to 5 years before anyone applies for Medicaid.

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WARNING! RECENT CHANGES IN THE LAWS MAY CAUSE SOME TRANSFERS TO HAVE ADDITIONAL LEGAL CONSEQUENCES BEYOND ESTATE OR MEDICAID PLANNING. ANY STRATEGY OF TRANSFERRING ASSETS INTO FAMILY MEMBERS' NAMES OR SIMILAR APPROACHES SHOULD NOT BE DONE WITHOUT FIRST SEEKING PROPER PLANNING AND LEGAL ADVICE. DO NOT EVEN THINK OF PUTTING A RELATIVE'S NAME ON A CHECKING ACCOUNT OR CD, GIFTING TO RELATIVES FOR COLLEGE EXPENSES, OR OTHER PERSONAL NEEDS WITHOUT PROFESSIONAL ASSISTANCE! THIS IS NO AREA FOR AMATEUR NIGHT! Buy Long Term Care Insurance.

This option may prove to be the best for many of you. You buy enough insurance to cover the risk of going into a nursing home, just like you buy auto insurance to cover the risk of getting into an accident. Even if you eventually decide to take a pass, and risk paying for a nursing home yourself, possibly wiping out your entire net worth, YOU SHOULD AT LEAST INVESTIGATE THE DIFFERENT KIND OF POLICIES AVAILABLE TO YOU before making a decision! How can you know if you are comfortable bearing the risk of being wiped out with nursing home expenses without checking out the options that this form of insurance can provide? You really have to see what choices you have before making any final decisions. Many retirees automatically assume that they can't afford long-term care insurance. But, unless you've taken the small effort required to see what's available...how can you know?

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Don't make assumptions about an area of your financial life that changes all the time, and that is so dangerous! We cannot stress enough that this risk is real and can be fatal to your financial well being. Let's take a quick look at an example of how this risk of having a nursing home stay can be minimized and how you can protect what you have. Elaine is 77 and lost her husband, Jack, to a heart attack two years ago. She is in pretty good health, other than a touch of arthritis and some high blood pressure. Jack and Elaine saved quite a bit for themselves over the years, and their assets look like this: Paid-for home IRAs (now in Elaine's name) Stocks and mutual funds Life insurance (cash value) Bank accounts and CDs TOTAL: $150,000 65,000 75,000 25,000 60,000 $375,000

Now, to a lot of people, this may seem like a lot of money and Elaine will never have to worry about any bills. After all, she's getting $950 month in Social Security and she hardly has any bills to, payyet. Unfortunately, Elaine started getting Alzheimer's disease, and coupled with a mild stroke, she had to have someone come into her home to help take care of her. This home health care was pretty expensive. For the home health care attendants to take care of her for 8 hours a day, it cost $2,500 per month. Unfortunately, this amount is not covered by most medical insurance or Medicare. Therefore, she had to take $1,550 out of her savings each month to pay the difference. With the $2,500 a month bill plus the cost of keeping the home, Elaine spends around $3,000 a month, or $36,000 a year. She loses several thousand each year but she still has some money left. A year went by and Elaine's situation got a bit worse. Her health had deteriorated, and she now has to go into a nursing home for round-the-clock coverage. A halfway decent nursing home in Elaine's community costs $4,000 per month.

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With the cost of keeping her house, Elaine realized she'd have to sell the house, especially since she wouldnt be going back. With $3,000 a month, or $36,000 a year, coming out of her savings, Elaine will probably be broke in around ten years or sooner if nursing home costs go up as predicted. If nursing home costs go up, as they have in the past, Elaine may soon be paying $6,000-7,000 in monthly nursing home costs. At that amount, Elaine will be broke in five years. In some parts of the country, especially on the east coast, it is not unusual to see monthly nursing home costs between $5,000-9,000 per month. At an annual cost of $60,000-108,000 per year, how long would your assets last? The bottom line is this: You have only three basic options available to you in order to avoid your family paying for nursing home costs:

1) Gifting and making asset transfers more than a few years before
getting sick, or

2) Buying insurance that pays some or all of long-term care expenses,

both in and out of a nursing home, or

3) Paying for all of it yourself.

Remember, new laws now make gifting assets more complicated and potentially trouble-causing. A gifting strategy must be considered very carefully before taking any action! So, insurance may be an option to look at very closely before you rule it out. If you dont use option one or two, option three is yours by default! Think about it Government statistics say that once we reach age 65, we have a 43% chance of going into a nursing home sometime during our lives. Structure your financial portfolio skillfully and intelligently for a secure and peaceful retirement. Nursing home expenses and other attached expenses continue to increase without any adjustments made to Social Security, Medicare or other benefits that will help support the aged.

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You and you alone will be responsible for paying for long-term care -nursing home expenses! You will not be eligible to receive any of the government's financial assistance programs (that you paid for all of your working life) until most or all of your assets are completely cashed out and used for any nursing home costs you incur. Medicare is defined as "a U.S. government program of medical insurance for aged or disabled persons." Medicaid is defined as "a federal and state program of medical insurance for persons with low income."

You have only three options to pay for nursing home expenses:

1) Pay them yourself dollar-for-dollar. 2) Transfer your assets three to five years before you apply for
Medicaid.

3) Transfer the risk to an insurance company by getting Long Term

Care Insurance.

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Chapter 11

HOW TO PROTECT YOUR ASSETS AND YOUR FAMILY WHEN YOU PASS AWAY!

From dealing with so many clients, we understand that this topic is a difficult one for most people to confront. That's because it reminds us of our own mortality. In fact, most people prefer to do nothing to secure their families financial future for after they die...simply because they don't like facing the inevitability of death. You can't turn the other cheek when it comes to planning your finances for when you pass away. If you do, you'll deny your family and loved ones what you want to give them and end up handing over your assets to the IRS and the attorneys! Like many others, you can continue making excuses and putting off this unpleasant task. It's an easy thing to avoid, because we just don't like facing it. But, if you neglect to do any estate planning prior to passing away, the IRS and attorneys will jump in to handle your estate. The results could deprive your family and loved ones of the assets that you took a lifetime to accumulate. The good news is... You can legally keep the IRS and the attorneys out of your pocket and control exactly who gets what from you! How would you feel if you worked all of your life and made some good financial investments and decisions in the hope that one day you would be able to pass some of your good fortune onto your heirs...only to never have this happen? And, as a result, create a great big hassle for your loved ones? Unfortunately, this scenario happens to many good people, because they put off estate planning until it was too late.

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When we meet with clients, we find some people at least have Wills written up. Good. Now, the next step is to update that Will (or Will(s) if you have a separate one for your spouse). Things change all the time in peoples lives that cause the need to update the Wills and other financial instruments. For instance, they move. Or they get divorced. Or they get married. Or they pass away. Or they get transferred. Or they lose their job. Or they have children. Or grand-children. Or they retire. Or they buy a second home, or retirement property. And so on. ALL OF THESE ARE HUGE FINANCIAL CHANGES IN A PERSON'S LIFE. Many people don't see how any personal transaction or decision in their lives affects their overall financial lives as well. And because of this oversight, they stand to lose what they've earned. Sure, you may realize that you need to change or update your Will for certain reasons... but have you? When was the last time you reviewed your Will to make sure everything was up to date? More importantly, do you know if all you need is a Will? For many people a Will alone will not achieve their estate planning goals. Whatever you do, we hope you don't have to experience a near tragic or a fatal incident in your life to encourage you to sit down with your estate planning attorney and advisors. Make a vow to do it now, and then you will have peace and security no matter what may happen. And before we move into estate planning in detail, let's promise to at least take the first step in getting you out of the group of people who don't have Wills. If you fall into this category, there's no other option available other than to just do it. If you don't, for many of you, you're asking for trouble. Because, if you don't have a Will, the government decides how your assets get dispersed. So, don't let this happen to you! Now, estate planning goes much further than having just a Will. It involves the ownership of your assets, how you have them set up, and how they'll be dispersed. We'll get into Wills, Living Trusts and so forth in just a bit. But remember that most simple Wills don't minimize estate taxes or avoid costly and lengthy probate, and so on.

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So, how can you minimize estate taxes? It depends on how you own your assets, and in whose name your assets are held! As we said, the most popular route is for husbands and wives to hold assets jointly, but this may not necessarily be in your best interest. There's a lot of ways to own your assets and many alternatives to help you avoid losing everything you own and wish to pass on to your loved ones. Jointly held assets means, if you both own your home, your cars, your bank accounts, investments, etc., and when one of you passes away, you will avoid probate and all the assets will quickly go to the surviving spouse. And if you own them with right of survivorship, that means 100% of the property or assets goes to the surviving spouse, while again avoiding probate. So, titling your assets in joint tenancy seems pretty good, right? And it's easy, right? However, it may not be the best way to go! Here are just a few reasons why.

1) Jointly held assets can be swiped away if there's a dispute, separation,

divorce, etc. Or, if you are involved in a lawsuit, even if it only involves one of you.

2) Jointly held assets can cause you to lose some control, while you're
alive, if they are frozen by the other joint tenant. Or, by the courts, if one or both of you become disabled.

3) Jointly held assets minimize all the tax-saving opportunities that are
available. As important as the first two reasons are, let's focus on the third one for a minute because we're talking mostly about getting you the most in tax-saving advantages! (We'll discuss lawsuits and what you can do in a later chapter.) First of all, grab a calculator. Seeing as some people think estate planning is only for the wealthy... let's reverse this myth. Add up the value of your house, your cars, your insurance policies (the death benefit), your investments, your savings accounts, your pension plans, any other real estate, any stocks, bonds, jewelry, furniture, stamp collection, etc. See how quickly your assets add up. If you own anything, it's an asset. For instance, life insurance is not estate taxfree. You may have a $2 million policy and find out you owe the IRS 55% of the death benefit if you own the policy. No, you didn't hear wrong. Life

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insurance is subject to estate taxes. It is free of income taxes to the beneficiaries, but you have to pay the estate taxes first. Most people don't know that. Now, either during your lifetime or at your death, you can get away with giving $2 million to your heirs without being penalized with federal estate and/or gift taxes, although in some states you may be hit with an inheritance tax for amounts much less than $2 million. If you're married, you're not constrained with any predetermined amounts. It's unlimited as to how much you can pass on to your spouse when you pass away, even on top of the $2 million you may have passed on to others. Seems pretty good, right? Well, let's take a look at what a difference it would make if you were holding these assets in joint tenancy. Let's say you predecease your spouse who is the joint tenant of your assets. Even though all of your assets would go to the surviving spouse, when that spouse passes away, it's back down to only passing on the $2 million! (Or whatever the new maximum is in the year a death occurs.) Do you know what this means? Huge Amounts Of Estate Tax Being Zapped On Your Heirs! If your assets total more than $2 million, anything above this amount is a target for the state and/or federal government! Your heirs could end up paying anywhere up to 50% of this amount, just in taxes! (The top tax rate is reduced to 45% in 2009, is eliminated in 2010 and comes back in 2011!) See, in this above example, when the first spouse of the jointly held assets passed away, they lost the maximum exemption. This couple could have passed $2 million+ tax-free to other heirs, while having all the rest go tax-free to the surviving spouse! But they didn't. Because everything was owned jointly, everything went directly to the surviving spouse. And yes, it was tax-free at that time; however, when the surviving spouse passed away, any amount of their jointly held assets over $2 million was taxed!

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If they had an estate of $2,500,000, they would needlessly pay tax on $500,000, which would cost the family almost $250,000! $250 grand lost by having their assets in joint tenancy! Make sense? If you want to save your heirs thousands in tax dollars, then you may want to reconsider owning your assets in joint tenancy. For example, you could set up a credit shelter trust. This allows you the maximum exemption, even when you pass away before your spouse. You'd have assets in your name alone versus jointly held. This trust could then pay the surviving spouse income in addition to as much as 5% or $5,000 per year of the trust's principal. And, when the surviving spouse passes away, the maximum (reaching $3.5 million in 2009) can pass through again, tax-free! And, any of the maximum exemption from the first person who passed away goes to your beneficiaries tax-free! Do you see how transferring jointly held assets to separate trusts can double the money you pass on tax-free? You will have to increase this amount each year up to 2009. Be sure to revise your estate plans accordingly keeping in mind that the old law, with the far lower limits returns in 2011. Now you may be wondering if this set-up avoids lengthy and costly probate. YES, it does if you own the assets in living trusts! This is one of the most ideal ways to set up your assets to save your loved ones and any other heirs the pain, the inconvenience, the frustration, and the taxes and probate expenses they otherwise may have endured! There are other ways you can own your assets, which we'll review in detail later when we show you how to avoid having your assets taken away due to a lawsuit. But we hope you are at least considering how you own your assets right now! If you want to KNOW that your surviving spouse and other loved ones are going to be well taken care of when you pass on, then please have a serious talk with your attorney. He or She will work with you to make sure your hardearned money and assets go to the right people in the most cost efficient way. Before we wrap up this topic of joint tenancy and how it ties in with estate planning, let's quickly fill you in on one more thing. Let's say you keep your

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joint tenancy. And, let's say one of you passes away. If the surviving spouse remarries and takes all of these assets, he/she now solely owns and puts them into joint tenancy with the new spouse. And, let's say this surviving spouse now pre-deceases the new spouse. What happens? This newcomer now owns all of the assets! And what does that mean to the original family and heirs? Well, depending on the newcomer, they may pass some of it along to them. Or, keep it all. Who knows? The point is, do you really want to hand all of the control of all your assets over to someone "outside" the family? Probably not, right? If you want to be in control of your assets and decide who gets what when either of you pass away, then let's start some estate planning immediately. Not for our sake, but for yours and your family! Otherwise, if you forget, make excuses, or just leave things the way they are without knowing exactly why you set them up that way... you're setting your family and loved ones up for a huge blow! What type of estate planning should I use? Since a lot of people perceive estate planning differently, we're going to take you through three critical elements of estate planning, so you can determine what's best for you! Like all planning, you have to start somewhere.

1) We recommend that you first start by sitting down with a Certified

Retirement Planner, CRP to review all of your current assets, your goals, your financial needs and wants, and the hopes and concerns you may have for the future. Have this person take a look at where you are today, financially speaking. It's like taking a snapshot and then blowing it up to take a good look at the entire picture. From this point, you can determine exactly where you are today. And this advisor can tell you what will happen to you and your assets if you do nothing.

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Now, prepare yourself ahead of time with a list of what you'd like to see happen. Take the advice of what will happen if you do absolutely nothing to your financial portfolio and compare it to this list of desires. Do they match? Or, are they heading off in totally different directions? If they are not the same, then you need to do some estate planning! Find yourself a competent retirement advisor who keeps up to speed with all the tax laws, loopholes and changes. (From the advice and information you are receiving in this book, we'd suggest that you pull out a few strategies we've shared with you and bring them up with your advisor. If he or she doesn't know what you're talking about, you may want to find-someone else.) From all the financial advisors and planners we've come in contact with.., let's give you a big tip: If you start hearing about financial products and canned sales pitches... walk away! This is not what you need. What you need are alternative suggestions that can lead you to solutions. Your advisor should be able to outline various ways of accomplishing your goals. Regardless of the techniques, your estate planning attorney and/or advisor will most likely suggest a Will, or a Living Trust, to be the cornerstone of your legal estate planning documents. And regardless of the size of your estate, you will probably need one of these (a Will or a Living Trust) to memorialize your wishes in writing. Which one is best? Well, most attorneys have a preference of one or the other. But for your sake and knowledge, here's what we've found to be the pros and cons of each. This list is not exclusive, and you shouldn't base your decision on this list alone. We'd strongly recommend that you contact an estate planning attorney to analyze your particular situation. Also, there are several good books just on the pros and cons of Wills and Living Trusts at your local libraries, bookstores and on the Internet. But for our purposes, let's give you a short-cut education.

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WILLS Pros: Wills are considered simple and easy to create. They are also usually much cheaper than trusts and the other documents that often go with trusts. Now, Wills can be simple or complex based on your personal finances; but, for the most part, they're pretty painless! Wills don't require the re-titling of your assets in most situations. You'll be asked to assign beneficiaries to your assets, but that's about it. And most importantly, Wills can be used for certain tax purposes and the naming of guardians for minor children! If you don't select guardians for minor children, and you should by chance pass away while they are still minors, the court will decide where they go...not you! Cons: The Will you create must go through probate, in most states, if your assets exceed a certain amount. (Probate is the legal term for the process of having the court review your Will and approve its terms.) Probate fees across the country range from 4-7% of your total assets. Not only do you get zapped with the probate fees, but the real kicker is that it usually takes anywhere from 6-8 months, and often times much longer, depending on your jurisdiction! Each community is different in their probate procedures, but two things remain the same: it's costly, and it takes quite a long time. Also, another drawback to Wills is that they cannot really address disability issues since Wills don't take effect until you die. This means you may have problems such as who will manage your finances if you become legally disabled or incapacitated. Sometimes a Durable Power of Attorney can solve this. But if not, the whole time you are disabled, your Will cannot go into effect. It only comes into play when you die. Many people have started to use a "Living Will" that you write before you get sick. And then if you do become disabled, the provisions of the "Living Will" take over, and your wishes are carried out as you instructed. This is for health care issues only, not financial matters. Just the same, often people think that very simple Wills will cover all of their assets, but joint tenancy rules and beneficiary designations do not follow the distribution rules in the Will! That means those assets will be distributed according to the designation on the specific account...not according to the Will!

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(Remember how we pointed out the problem of joint tenancy a few pages back? Remember to analyze your ownership of assets before it may become a problem!) Let's say you are married and jointly own your home. And let's say your Will has assigned your home to your first son, Tom. Now, your spouse suddenly passes away and the home has now been assigned to you. You have no way of keeping up with the mortgage payment, utilities and so forth. And on top of it, you become permanently disabled and put into a nursing home or care facility. What happens to the house? Well, chances are the bank will foreclose on it, and you'll lose it. Or, you'd have to get someone to help sell it for you. Either way, the house is gone. You either sell and take a loss, or the bank or Medicaid (in some states) gets it. Not your kids, or whoever you left it to in the Will! When your spouse passed away, because you jointly owned the property, it became yours. And even though you're disabled in a nursing home, the Will cannot go into effect and the property passed on to whomever you want it to go to. Pretty lousy situation, huh? That's why we list this as a "con," because it is definitely a risk factor in a will! LIVING TRUSTS Pros: Living Trusts avoid probate in most states if your assets are fully titled in the Trust. By avoiding probate fees, you could save thousands of dollars in probate costs, and all the court and attorney fees incurred in the probate process as well as all the time probate takes. Normally, Living Trusts are much more detailed than a Will in the way your assets will be managed and distributed. They are much more specific and provide a very good framework of leaving instructions to your heirs. Living Trusts may also avoid problems if you become disabled and if your assets are setup properly in the Trust. This is because a Living Trust can protect your assets if you become disabled.

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Living Trusts have become very popular. In many areas, Living Trusts are the preferred estate planning method. Talk to your estate planning attorney and certified retirement planner about them. Chances are, they will agree that Living Trusts offer more benefits and more specific directions for the disbursement of your assets. Con: Living Trusts usually cost a bit more than a Will to draw up, but that is because they are much more detailed and involve a lot more work in preparing them. Although a Living Trust can save you a bundle in probate fees, we wanted to make you aware that only an attorney should prepare it. Several scam artists have gone around the country "selling" Living Trusts. If you bought one of these, chances are you may not be protected. Have a qualified estate planning attorney review your plan. Also, Living Trusts will ONLY avoid probate or a guardianship if the assets are actually titled into the Trust. If you leave any assets untitled outside of your Living Trust, they may then still have to go through probate. You really want to keep in mind that if you want full protection of the disbursement of your assets, then title all your assets into the Trust. This may cause a bit more work on your end, and a bit of preparation time, but it all depends on what you want. It will involve re-titling of all your assets into the Trust, and changing beneficiary designations. A Will is simple, cheap and allows you to assign beneficiaries. A Living Trust handles all of your assets, gives you maximum security and eliminates costly probate of your assets. OTHER ESTATE PLANNING STRATEGIES While we won't provide complex technical details of advanced estate planning strategies, we would like to briefly discuss some examples of planning techniques that may be of interest: Charitable Remainder Trusts (CRT). We discussed CRTs in Chapter 5 and all the income tax benefits they provide. But that wasn't the

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whole story! Besides being able to sell assets without paying any capital gains tax, you get two huge estate planning benefits: i. You can get a lifetime income from the earnings made off of the assets for the rest of your and your family's life! ii. When you pass away, all of the assets in the Trust are excluded from your estate! So that, not only do CRTs provide zero capital gains tax when selling assets, they also provide zero estate taxes on those assets! Here's another amazing part of a CRT. Since the assets inside the Trust are ultimately going to a charity, the kids or grandchildren will not get that portion of the estate. But, since there is usually an income tax savings from the charitable deductions, you can use a small portion of the tax savings to buy a second-to-die life insurance policy with a face amount that's the same amount as the assets put into the CRT! And this life insurance policy can also be estate tax free by putting the policy into an insurance trust! Now, the younger generations will get the full value of these assets completely estate and income tax free! A CRT is an amazing tool that most people simply don't know about. Reverse-Mortgage. Another great estate planning strategy that is almost unheard of is called a Reverse Mortgage. This works where you continue living in the home that has no mortgage, but need the money that is tied up in the house to use for living costs.

If you sell the house, you obviously can't live there, and refinancing may cost you lots of fees and force you to have to pay back the money in ever-growing monthly payments. So what's the solution? A Reverse Mortgage. A Reverse Mortgage works like this: You sign an agreement with a bank and they pay you a monthly payment. You do not refinance the house, but use the equity in the house as the source of funds. So basically, if you have a $100,000 house that's paid for, you could get $700 a month (more or less depending on your age), for 30 years without having to move out of the house, refinance the house, or sell it when you pass away. The

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bank has a lien on the house and gets its money back with interest when you and your spouse die. There are also estate tax benefits from implementing this strategy. It's an excellent tool to provide income from equity in your home that might otherwise sit unused while reducing your taxable estate at the same time. There are various rules you need to be aware of, and planning techniques that one can use in order to accomplish your estate planning goals. Just so you understand, this book is not designed to explain each and every planning technique in detail and how they work. There are many other books that focus just on those issues. What we want to accomplish is to make you aware that most EVERYONE needs some type of estate planning! And when you take steps into estate planning, your attorneys and financial advisors can help recommend the various techniques and details that may be available to get you, but it's YOUR job to determine where you want to be! To help you out, we've prepared a list to assist you ahead of time in answering questions you'll be asked. Don't worry if you don't have immediate answers. Part of the estate planning process is helping you to answer these questions. We're just giving you a sneak preview of the many questions so you can start thinking about them TODAY, and then sort through the fine details when you begin the process of estate planning with the professionals you've chosen. 1) Who do you want to raise your minor children (if applicable) when you pass away? Remember that you should have 2-3 back ups."

2) Who do you want to manage your assets if you become sick or pass away?
Again, remember to have "back ups."

3) Who will make any medical decisions for you if you are unable? 4) Who will receive your assets? 5) How will your heirs receive these assets? Will it be in one lump sum or
spread out over several years? Or, will they only get the income, with the remainder going to someone else?

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6) Who will receive your assets if your primary heirs predecease you? And,
how do you want those assets distributed?

7) Do you have any charitable goals in mind? 8) Do you have personal assets (jewelry, mementos, figurines, etc.) that you
want a particular person(s) to receive?

9) How important is estate planning to you? 10) Are you willing to give up some control to save thousands in taxes and
future legal fees?

11) What is the relationship you have with your children? 12) What assets do you own? What are their fair market values? Do you own
them jointly, and if so, with whom? What did you pay for these assets? (Don't forget to Include the value of any life insurance and retirement plans!)

13) How old will your heirs be before they can have access to the money?
Besides the above, there are many more questions that will need to be answered. However, this list should show you the most common questions you'll need to address first. Your advisor's job is to guide you through the estate planning process from AZ. And it's also his or her job to ask probing question about your goals and objectives. YOUR job is to make sure that you have CLEARLY defined goals and objectives! You should be given plenty of alternatives and full explanations of their benefits or downfalls. It is only from understanding these various techniques that you'll be able to make the best decisions. You'll be able to weigh your options and pave the road to your desired goals. And oftentimes you'll find that advisors will recommend a combination of techniques in order to achieve your final desired results, which is a good thing.

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Just as a doctor may prescribe several medications for different health problems, your advisors will prescribe different planning techniques that work together as part of an overall master plan. What Will Happen If You Don't Do Proper Estate Planning? Actually, we have two answers to this question. (We hope you realize by now what a mistake it is not to do proper estate planning!) 1) TAXES: We've already gone over the details, but we just want to repeat how costly and needless these estate taxes are. FEES: Look out...if you do not implement proper estate planning, you'll be shocked at all the fees you and/or your heirs will certainly encounter!

2)

For instance, you could incur unnecessary probate fees, legal fees, guardianship fees, and court costs...just to name a few! These fees are mostly going to attorneys, but some also go to the court and government. The sad part is that these fees can mount up to a large percentage of your estate and are mostly a total waste of money! This is no joke. We've seen many people pay through the nose in unnecessary fees. And the most shocking thing to us is that many of these people weren't even aware of them. But now you are. And you have to do something to avoid this from happening. Not tomorrow. Not next week or next year. You must do something right now. And although hiring advisors is not free, it will cost you a heck of a lot more if you don't! In the real world, it will cost you substantially less to protect your assets than if you don't protect them. That's it. End of story. We hope you see the big picture and do something! DO-IT-YOURSELF RETIREMENT PLANNING Unfortunately, too many people are buying computer programs, books or surfing the Internet for ideas on how to "create their own estate plans." This is

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as bad as buying a computer program or book on "how to perform your own open-heart surgery!" We're serious. This has become an epidemic that's sure to kill many people's financial picture! And needless to say, it's a very dangerous gamble to take. Although it may seem less expensive than seeking the advice of competent attorneys, accountants, retirement planners and other advisors, you'll be dealt a bad hand if you choose to do it yourself. And even worse than that, many of these programs and their documents may not even be legal in your state! For example, in these do-it-yourself Living Trust kits that are popping up, in almost every situation, the forms will not meet your requirements. And if they don't meet your requirements, they won't be implemented properly. Just like you wouldn't get a do-it-yourself kit to perform open-heart surgery on yourself, you shouldn't think that you don't need estate planning attorneys and advisors to help you. Remember it's cheaper to hire a Ph.D. than it is to become one! This is true not only for you, but for your spouse and your family who will have to hire advisors to fix the problems created by any "home remedy" do-ityourself estate plan. All in all, estate planning can seem very complex. The principle of it, however, is not. As we've taken you through this chapter, we certainly hope that it has hit home with you on how important estate planning is for EVERYONE. The principle is simple...either you plan, manage and control the distribution of your assets for when you pass away... or you don't. Think about it... You can legally keep the IRS and attorneys out of your pocket and control exactly who gets what from you. If you own anything, it's an asset. Estate planning is the building up (accumulation) (ownership), taking care of (management) (set up), and distribution (disbursement) of your assets after you're gone.

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What type of estate planning should you use? Sit down with your financial advisor to review all your current assets, goals, financial needs and wants, plus your hopes and concerns for the future. Be sure your advisor(s) keep up with all the tax laws, loopholes and changes. Seek alternative solutions! Wills are considered simple and easy to create but must go through probate in most states if your assets exceed a certain amount. A Living Trust is more detailed and specific than a Will but avoids probate in most states. If you do not plan your estate properly, your estate can be wiped out by: 1) Taxes - estate taxes and, 2) Fees - probate, legal, guardianship and court fees!

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Chapter 12

HOW TO PROTECT YOUR ASSETS FROM BEING TAKEN AWAY IF YOU GET SUED!

Most people think it will never happen to them. The thought of being sued and having everything taken away just doesn't seem like it could happen...it only happens to others! Well, this is a new era, and we are living in one of the biggest lawsuit-happy times ever. People are getting sued left and right. Lawsuits are a fact of life that everyone needs to be aware of and prepare for. See, if you don't prepare and safeguard your assets from being confiscated from a lawsuit... You stand to lose everything! Now, since the last thing we want to see is you being sued and left homeless and broke, we're going to outline five different sections, with sub-sections about lawsuits and how you can protect yourself from being wiped out! 1. Preventive Medicine For Your Financial Health! Unfortunately, there's no other way around the fact that lawsuits are a way of life in America. Lawsuits are becoming a household term. Our litigation explosion has caused attorneys, legislators and the general public great concern. In fact, the Department of Justice recently reported that there are some 100 million active lawsuits going on and clogging our court system! There is a new lawsuit filed every 30 seconds in this country! Pretty scary stuff, huh? And unfortunately, no one is immune to having a lawsuit slapped in his or her face. It can happen to anyone, anytime, anywhere.

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Depending on your occupation and your life-style, did you know that you have a one in fifteen chance of being sued sometime during your lifetime? Now, obviously doctors, attorneys and other service professionals are more likely to be sued because of their chosen occupation. But that doesn't reduce or eliminate your chances. You are just as likely a target for getting sued as anyone else is. Although we can't do a darned thing about protecting you from a lawsuit being filed, we can help you protect your assets so that if and when it happens, you won't lose everything you own. We'll be taking you through these strategies in just a bit. Do you think you are impervious to a lawsuit? Let's talk about this for a minute. How many times have you heard about someone you know getting sued because of a car accident, a family dispute when a parent dies, a bad tenant, or even because of the present your pet left in the neighbor's yard? For instance, we know a person who is suing the contractor who was roofing his house. This homeowner fell through the roof and broke his ankle. He managed to do this because he was up there at 9:00 at night, in the dark, blowing leaves off the roof when the job wasn't even finished! Yet, the roofing contractor will pay through the nose for the homeowners dumb mistake. Not only can even the most pathetic lawsuits happen to you, they probably will happen to you. In this society, anything goes when it comes to suing one another. You may not be defending yourself in a big case, and maybe not a case that's going to make The New York Times front page, but it is a suit just the same. It will drag you into court, cost you a small fortune in legal fees, aggravate and disrupt your life, and generally be a major pain in the you-know-what! And guess what? Even if you win a lawsuit, you lose! Most times, you may need to spend thousands of dollars to defend yourself even in the most frivolous of lawsuits!

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Let's say your neighbor came by your house for a cup of coffee. The coffee spills and your neighbor gets burned. You get sued for pain and suffering because your coffee was too hot. I know this is frightening, but it's reality. And as ridiculous as this may seem, a lousy cup of coffee could end up costing you thousands in legal fees! And to make matters worse, even your liability insurance does not cover you for all situations. So if your insurance doesn't pay, guess who does? YOU! We've all heard about how McDonald's was sued for $3 million for spilled coffee that was too hot. The woman who sued won, and even though she didn't get the whole $3 million out of it, McDonald's still had to pay. Not only that, but it served as a huge reality check for others as to how greedy and lawsuit-happy our society has become! A poll indicated that most Americans thought this woman was wrong for the lawsuit, but who cares? She did it and came out with a nice sum of money! Now that this McDonald's incident occurred, have you noticed that the major fast food chains now print "Caution-Contents Hot" on their cups? In fact, many restaurants print this warning label in different languages in an attempt to cover all the bases! Do you think our Founding Fathers ever thought that serving hot coffee could cause such a travesty of justice? Sooner or later, someone will sue because the ice cream is too cold, a pillow too soft, and if it hasn't happened already, someone will no doubt sue a hammer manufacturer because they hit their own thumb with the hammer! The litigation craze is out of control! It's so bad that the insurance industry constantly reports fraudulent claims against consumers...staged accidents, set-ups, etc.! There are actually "professional" suers! And, because of these claims, the cost of insurance goes up for everyone, sometimes as much as $200 for each individual auto policy! We already pay for the criminals with our tax dollars, and now we actually pay for them to profit from us a second time. Do you see what we mean? For example, a woman named Cathy rear-ended another car. In all honesty, it wasn't her fault. For no reason at all, the driver of the car in front of her went

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from cruising at 45 mph like everyone else to suddenly slamming on the brakes. There was no reason for braking. Yet, Cathy couldn't do anything but slam into her. And Cathy got sued by the other driver! The driver claimed whiplash and mental duress. And because Cathy was in the rear, the insurance company and judicial system automatically made her guilty. She now had to pay $200,000 from the lawsuit on top of the $5,000 it cost her in legal fees. She lost her home, her car, her investments, and just about everything she owned. See, her insurance coverage was only for $100,000. She had to come up with the rest! This wasn't even the worst of it. The other driver had been involved in four other lawsuits prior to Cathy's! She was a "professional." She knew how to get rear-ended and make the driver pay through the nose. This was her career. She made her living by suing people! But you know what? The courts didn't care that she was a repetitive lawsuit slapper. Maybe someday they'll look at her history and toss her in jail for fraudulent staging of accidents, but who knows? If she does get thrown in jail, we'll be paying for her stay with our tax dollars. And Cathy? She's barely getting by financially, her insurance company hiked up her rates, and she's petrified to get behind the wheel of an automobile again! Cathy was driving an expensive car. This other driver knew she had some money. Cathy was a perfect target for her lawsuit attack! You may be sued when your neighbor slips on your wet, or icy, sidewalk. Now, they may claim, "Oh, I'm not suing you. I'm just trying to get the money from your insurance company! Of course, they may not realize that you might have your insurance canceled because of this stunt. Or, that you may not have enough insurance to cover the claim and you have to pay the difference out of your pocket! They don't think about these things. These are the crimes when ethical, moral, and just people are preyed upon by those in our society who think that suing someone frivolously isn't bad. Or wrong.

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They are only thinking of themselves, and how much money they can get from you and/or your insurance company. You have to realize that it is truly a legal jungle out there. In many situations, lawsuits are nothing more than high tech blackmail! What do we mean it's like high tech blackmail? Here's how it goes. "If you settle, we won't drag you through a long, expensive trial in which a sympathetic jury might rule against you." You're roped. And, honest people are held accountable for actions they did not commit! And unfortunately, unless you can hire a good lawyer, the scales of justice may be against you. Do you think that the poor grandmother living off Social Security can afford the same lawyers that a wealthy heiress can? Do you think they'd be equally represented if they got sued? Most Americans, including lawyers and judges, would probably agree that money does indeed help to buy yourself a good defense! (Remember OJ Simpson?) The best way of protecting yourself from a lawsuit is not to become a target. If you use a little preventive medicine, you can apply it to lawsuits as well. Do you think the auto accident scam artist would have targeted Cathy if she was driving a 1980 Chevy? Or an old beater? No. These professional lawsuit criminals are looking for Cadillacs with a senior citizen sitting behind the wheel, the banker who drives a Mercedes, and the guy in an Armani suit driving a Lexus. Why? Because if it looks like they have money and good insurance, they advertise that they are a good target for these con artists. Just like you wouldn't walk around with expensive jewelry in a crime-ridden neighborhood or flash your cash in a public bus station, why advertise that you are an easy target?

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Now, this doesn't mean that we shouldn't drive expensive cars, because we may get sued. It just means that people take the risk of lawsuits if they advertise their wealth. That's all there is to it. If someone's ego or need to flash their status suits their personality, then they will also be putting a bulls eye out for being a lawsuit victim. In case you aren't aware of this, let's explain how contingency lawyers make their money. They project what 1/3 of the final judgment of a lawsuit will be, and then decide if they'll take the case or not, because that's what they'll get paid! Meaning, contingency lawyers aren't exactly looking to sue the grandmother who is living on Social Security with only $50,000 in liability insurance. Not at all. They want people with money! And it is quite easy for these lawyers to determine how much money you actually have before deciding to take your case! Computer searches of your wealth go on all the time. Credit reports, medical records, financial transactions are shockingly easy to get! They can tap into your personal and financial life with a few key strokes on the computer and a couple of phone calls! Your personal affairs are not considered private to them when it comes to seeing how much money they'll get out of you if they take your case. Attorneys first see what assets you possess, and are available, before they take a case! And to make matters worse, most people think their insurance coverage is enough, when it's not. Many times insurance doesn't cover what you think it would. Remember, all lawsuits are not frivolous. We all make mistakes, and sometimes we goof up and are truly at fault. And yes, sometimes people are hurt or killed because of these mistakes. And rightly so, those people or their family members need to file a suit and be compensated for the damages we may have caused. But, what happens if we have an auto accident and kill a forty-year old stockbroker who was making $300,000 a year? And has a wife and children? Do you think your $100,000 auto coverage will protect you? Do you think that the stockbroker's wife would be pleased to only get a few hundred thousand in life insurance, and maybe $100,000 from your auto coverage, and some Social Security payments for her kids?

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It's doubtful. Remember, when people injure us, it's human nature to fight back and protect our own interests. So in this case, you'd get sued by the stockbroker's wife for the loss of income that stockbroker would have made, the pain and suffering that the family went through, and potentially punitive damages for ruining his family's life. This could end up being a multi-million dollar suit! If your $100,000 pays out, where do you think the rest of the money will come from? Well, they'll start going after your home, your CDs, your mutual funds, and possibly your IRAs! Wherever you've got money socked away, they're sure to find it so they can take it from you! Are you beginning to see why you need all the protection you can get? 2. Ownership Of Assets There are various ways to own your assets, as we discussed in the chapter on Estate Planning. How you own your assets can make or break your financial picture if you pass away or are involved in a lawsuit. The states differ on how your assets will be protected, or not, if you are sued. For instance, in some states creditors cannot take possession of your house even if it's worth $2 million dollars! But, in other states, you'll lose your home no matter what it's worth. Quite a difference, wouldn't you say? Same goes with the rules for any annuities, life insurance policies, personal assets, etc. -- what you can lose varies from state to state. One important appointment or phone call you make to your attorney can fill you in on what assets your state protects and what they do not. And while you're at it, there are certain federal rules to know as well. For instance, one federal rule says that pension plans are protected. However, IRAs don't fall under this protection, and it is up to your state to protect those assets. In some states they are protected, in some states they are not. Do you know if your assets are protected?

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So, if you reside in a state that says "no go" on some types of retirement plans, they can reach into your retirement plan and snatch them out from under you during a lawsuit! You've heard of "reading the fine print" before, right? Same goes with the "fine print" in your state laws, and in comparison to the federal laws. These rules are important to know, so you can set your assets up appropriately, to be positioned beyond the reach of the attorneys if you're in a lawsuit! As you also probably know, married couples can own their assets in many different fashions. It can be joint tenancy, tenancy in common, credit shelter trusts, tenancy by the entireties; and there's also community property, noncommunity property, exempt assets and non-exempt assets. Whew! That's a lot of options! What's best for you? It all depends on your personal situation and how well you want to protect your assets. The most important question to ask yourself when deciding how to own your assets is, "How do you own your assets, and why?" The "why?" question is the hardest for most to answer. Most people will say they own everything in joint tenancy, but they can't tell you why. Some of the worst answers are, "Well, that's how we always owned it!" Or, "That's what the bank told us!" Or, Thats what mom and dad did!" If you don't see why these answers are so awful, you may want to re-read Chapter 11 on Estate Planning, where we took you through some very valid reasons as to setting up your ownership, and why! Now, think about your own answer to the above question. Why do you own your assets the way that you do? If you can't come up with a real good reason, you need to talk to your advisors to find out how and why you should own your assets, not only for creditor protection, but for tax reasons too! If you're involved in a lawsuit, frivolous or not, there are certain ways you can own your assets that can't be penetrated by creditors. Sometimes, not always, but sometimes it will work if you put your assets in your spouse's or children's names. We can't tell you specifically that this will safeguard your assets or not, because again it depends on your states laws. It also depends on the claim against you and the type of assets you own. So the best advice is to get some good legal and financial planning advice.

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For instance, reassigning your assets to your spouse or children may not work, because there are some assets you are prohibited from transferring. And, you can't transfer your IRA or pension plan without getting slapped with the tax penalty for doing so! Plus, with the new transfer laws, transferring assets can be dangerous and lead to unanticipated consequences. There are a lot of questions, issues and concerns to be addressed first. It's not painful, and it doesn't take a whole lot of time. But it has to be done. Once you can determine: a) how you own your assets; b) why you own them that way; c) what the federal and state rules are; and, d) how you personally want to ensure protection of your assets...it is only then that you can put together a bullet-proof plan! Remember how easy we said it was for creditors to click a couple keys on the computer and in a flash learn everything they want to know about your financial status? This concerns some people, as it should. It kind of breaks the "right to privacy" notion we all want to believe in, doesn't it? For any of you who are concerned about creditor protection, you can relax a bit, there are certain types of trusts and partnerships that can provide a buffer against certain types of suits and judgments. You can create your own barriers with some good maneuvers. We also strongly urge you to consider getting a minimum of a $2 million liability umbrella policy that would cover you for lawsuits above the base coverage you have on your homeowners and auto policies. Most people only have $100,000 to $300,000 auto liability coverage, which will just not be enough in most lawsuits. If you have only $300,000 of liability coverage, and lost a $1 million suit, the insurance company would pay the first $300,000, and you'd pay the other party the remaining $700,000! (What? You don't have $700,000 you'd like to pay to someone who sued you? Then get a $2,000,000 umbrella NOW...before something happens!) We'll talk more about this in the chapter on insurance, but we needed to mention this here. Check with your agent to find out how much the umbrella policy will cost. Dollar for dollar, theyre one of the most cost effective policies available.

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The key to remember in your whole financial scheme of things is that there are both simple and complex ways to protect your assets from creditors, lawsuits, bad business deals, and various other threats against your assets. Just as you should do regular check-ups of your estate plan, retirement plan, and investment plans, you should also do a periodic risk analysis to see if you have done all you can to avoid having your assets confiscated. Make sure you have enough liability insurance, and make sure you own your assets in the best possible way to make them less of a target. 3. What Happens If You Get Sued? A. If you are ever served papers initiating a suit against you, the first thing you should immediately do is hire an attorney who specializes in defending claims of the type youre facing. We wouldn't recommend trying to defend yourself. The legal system is full of details one can easily overlook. There are certain deadlines, subpoenas, and other legal matters that must be addressed in a timely manner. Now, if you get sued because of an auto accident, immediately contact your insurance carrier. Your insurance company will usually provide an attorney to defend you if your coverage provides for it. B. If you get sued because of an auto accident and you don't have insurance, don't wait until the day before the court date to find an attorney! Preparation for a trial takes time, and you'll give the other side a huge chance at winning if you don't understand the system. Remember, "Ignorance of the law is no excuse." As you already know, hiring an attorney will cost you some money. No ifs, ands, or buts about it. But if you try to guess at the complex judicial system and do not hire an attorney, there's no question that it will cost you much more in the long run. Also, make sure that you get an attorney who understands the type of matter you are involved in to make sure you get the best defense. There are different types of lawyers who specialize in different areas. So, if you're in an auto accident, your real estate attorney who closed on your house may not be the best person to defend you. Your divorce attorney probably can't help you in a wrongful death claim against you. And so on. Find one who studies that particular area of the law as a living.

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Just like the practice of medicine, you probably wouldn't go to your heart specialist if you broke your leg. Or you wouldn't go to a podiatrist if you felt faint. The exact same goes with the types of attorneys from which you have to choose! As the saying goes, "don't try to fit a square peg into a round hole." Even if your neighbor's best friend's son's wife is an attorney, his or her specialty may not fit your specific needs. If you get sued, don't panic. That may seem like an unreasonable tip, but you'd be surprised at how many people get scared stiff and start doing crazy things. Some will act guilty, even if they aren't! What do we mean by that? They get sued, and even though they may be innocent, they start transferring all their assets to their kids, sell the house, and move to Belize. You name it! First of all, these hasty decisions are usually an overreaction to being nervous and scared. Second of all, and more importantly, transferring assets after a suit is filed, even small transfers, could be considered a fraudulent transfer that can be quickly reversed by the courts! If you're being sued for $1 million, and the court says you have to pay up, you shouldn't pat yourself on the back if three days prior you transferred all your assets into your kid's names. In fact, it is wrong. It won't work. And more importantly, it could get you into even more trouble! Transferring funds after a lawsuit may even be a criminal matter! In other words, it doesn't do you any good to transfer any assets after you get sued. This sums up the message of this whole chapter! What are you going to do with your assets before anything like this happens? Waiting until after something happens isn't a good answer. 4. A Word About Criminal Matters Do you know the difference between civil and criminal charges? Or how a lawsuit can many times consist of both charges?

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If you were in a car accident and someone is killed, you could face a wrongful death claim, which is a civil claim. Money for damages will be sought, while at the same time there's a possible criminal charge of vehicular manslaughter. And again, money for damages may be sought in addition to jail time! The biggest key is not to rely on the advice of your friends, or your neighbors or your church group members or your accountant... not even this book. Your best bet is to seek the advice of a good attorney. 5. How To Start Over If you happen to get sued, and you lose, there may be some relief. You may be able to file bankruptcy or rely on certain provisions of your state to protect some of your assets. Or, sometimes insurance pays the claim, and the worst thing that happens is your rates go up. On the other hand, you could lose everything. All that you have worked for in your lifetime could go up in smoke. To avoid the latter from happening, take a good hard look at your assets. Determine the best methods of protection based on your personal situation, then take the next step and DO lT! Good and honest people get sued. Good and honest people get wiped out because of what they do and/or don't do with their assets. And one thing is for sure...lawsuits are rampant. We live in a treacherous legal environment. If you don't take some preventive steps now, you may not be able to protect yourself later. Think about it

Lawsuits are a way of life in America. Lawsuits can happen to anyone at any time. Liability insurance will not always cover you in a lawsuit. Honest people can be held accountable for actions they did not commit.

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Use preventive medicine and do not become a target. All lawsuits are not frivolous.

Ownership of assets:

You must be aware of your states rules in order to set your assets up properly and place them beyond the reach of attorneys in the event you are sued. Married couples can own their assets in many different ways. There are certain ways you can own your assets that can't be penetrated by creditors. Consider a Liability Umbrella policy to protect yourself from claims in excess of the base amount contained in your homeowners and automobile policies. Do a periodic risk analysis of your situation.

What should you do if you are sued?

Hire an attorney who specializes in your type of claim. Don't panic. Stay calm. Do not make hasty decisions.

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Chapter 13

INVESTMENTS MADE EASY (HOW TO MAKE THE RIGHT CHOICES WITHOUT ANY HYPE)

We've come to a point in this book where we're going to talk about an area of finance that is probably only second in confusion to insurance. What is it, you ask? Investments. We can't tell you how many times we see things people have done with investments that just don't make any sense. We see so many people who really dont understand what investing is all about. What investments really are. What they should be, what they shouldn't be. What they can do for you, and what they can't do for you. Let's talk about investments and give a couple of case studies to illustrate our points. The first thing we want to do is identify what the word investment really means. If you look in the dictionary, "investment" is defined as "to commit or use money or capital for the purchase of property or a business, etc. with the expectation of profit." Pretty straightforward, right? To expect a profit. The whole concept behind the term "investment" is for you to take the money you've already made, one way or another, and make it work for you, so it returns more than you started with. It's a pretty simple concept, yet the simplest things are often the most complicated. Take the case of Wally and Joann. Wally and Joann are married and in their 60's. Wally used to be an accountant for a major manufacturer where he worked for 37 years. Joann didn't work outside the home until their children were grown, and then she took a job as a counselor for a local social work organization. When they retired a few years ago, they decided they should figure out what to do with the money they had from their IRAs, savings from over the years,

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money from the sale of their home (they bought a much smaller home after the kids were gone and basically left the money sitting in the bank for quite some time), and other various assets they owned. When they finally decided to do something about their financial situation, and take care of their investments, they went to see an investment counselor at a large national firm. He told them that for people in their age bracket, they would be best off owning a U.S. government bond fund. They got a nice brochure and prospectus from the salesperson, with a picture of the American flag and fireworks on the cover, which talked about the fact that 100% of the money invested in this fund would go into U.S. government securities, which were backed by the full faith and credit of the U.S. government. The time was late 1986. Wally and Joann liked the idea of putting their money in the U.S. government. After all, they felt patriotic and thought the idea of having the full faith and credit of the U.S. government backing their investment was about as safe as you could get. Sounds good, right? But, while it was never said, and maybe never even implied, there lurked some feeling that these might be "kind of' like CDs -- "kind of' guaranteed because it was an investment dealing with U.S. government obligations. Anyway, in the spring of 1987, Wally and Joann (along with millions of other Americans) had a major shock. For some reason, interest rates jumped almost two percentage points in a matter of a couple of weeks. Interest rates on things like long-term government bonds, mortgages, etc., moved up with no warning. Wally and Joann followed the price of their bond fund in the local paper because it was listed with the other mutual funds. One day while Wally was drinking his morning coffee, he called over to Joann in horror to show her the price of their bond fund. It had dropped several dollars a share. In fact, since Wally was an accountant, he quickly figured out it had dropped 19% in value. They were both stunned and thought it must be a mistake. They immediately called their investment salesman to ask him if there was some problem with the price quoted in the paper. He regretted to inform them that no, there was no mistake. The fund had dropped that much in value but would probably come back. What they didn't understand was this bond fund was investing in 30-year government bonds and was using a technique to enhance the income the fund

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was generating, which at the time was touted to be between 10-11%. The combination of the 30-year bonds and the technique the fund used to enhance the income with the sudden rise in interest rates caused the value of the shares to plummet. Their $100,090 investment was worth barely over $80,000, and they'd only been in the investment for a few months. Yes, they had made a few thousand dollars of interest income over that time, but they had taken that money out and used it to live on. They were devastated. How could this happen? What went wrong? When they came to get help, the first thing that had to be done (as usual) was look at their whole financial picture. In the course of designing their retirement plan, they needed help dealing with what had happened to the bond fund. The news wasn't so good. Wally and Joann had encountered a very interesting phenomenon in the world of investments. The law of gravity works on investments just like on objects. Or, in other words, it takes more "energy" to get an investment up, after it's gone down! When an investment declines in value, it has to increase more than it lost in value as a percentage...just to break-even! For example, when the stock market caved in 2000, 2001 and 2002many people lost 50% or more of their stock values. As an illustration, lets say someone you know had put in $100,000 into the market in 1999, and two years later in 2001, the stocks were worth only $50,000. Thats a 50% drop in value, right? Now, if the stocks went back up 50% from the $50,000 value, would that make them whole at a value of $100,000? NO! IT WOULD NOT! A 50% increase in value from $50,000 would only be $25,000making the stocks worth only $75,000. Still a big loss from the original $100,000. In order for the $50,000 value of stocks to go back up to $100,000the stocks would have to increase by 100%. Thats right. A 50% loss in stocks would require a 100% gain to get back to even! Now in Wally and Joanns example of them putting $100,000 in the bond fund, and it dropping 20% down to $80,000. If that $80,000 increased 20%, it would

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go up $16,000 and they would only have $96,000. It would have to increase 25% to actually get back to the $100,000. As a percentage, it has to go up more than the 20% loss! This is one of the rules of investing that most people don't think about. Investment salespeople don't like to talk about it because it is so hard for people to make up lost ground on investments that go sour. Which is why it's so important to do some of the things we're going to discuss later in this chapter, particularly diversification. The advice given to Wally and Joann was to sit tight because they didn't have an immediate need for the money, and we thought, considering their other assets, it might not be a bad idea to wait and see if things came back. Fortunately, over a period of years, the funds did eventually come back to the $100,000 they started with. At which time they decided to sell the fund and put the money elsewhere. They were lucky because they hadn't put all their eggs in one basket. They're also lucky because the fund did come back. The real lesson here is that they made an investment decision without first having it done in the context of a plan. And, They made investment decisions based on fancy brochures and beautiful pictures, with no clue what they were buying or how it worked. While we're not insinuating that the salesperson misled them in any way, we are saying that the marketing materials and the way the fund was presented to the public certainly gave the impression they were dealing with U.S. Government guaranteed money, when in fact they were not. They were actually dealing with securities, which like all securities, will go up and down in price, sometimes for no apparent reason. Let's talk about another couple, Barb and Dave. Barb and Dave were both 61 years old. They owned and worked together for years in a retail company that they eventually sold to their manager, Cindy, and retired with a nice chunk of change in their pockets. When Barb and Dave sold the business, like Wally and Joann, they went to see an investment counselor at a large national firm.

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In their case, the investment counselor recommended they put the money from the sale of the company into some real estate investments (limited partnerships) that were supposed to have duration of 3-4 years, which was the timeframe they wanted the money available for the particular things they wanted to do (trips, summer home, golf club membership, that sort of thing). They put the money into the partnerships and several problems occurred. One was because of the general decline of the real estate market, the value of their investments dropped significantly. The second one was, they discovered, there was little or no market for their shares of the investment when they wanted to sell later on, and they were stuck with the investments. The third problem was they had put almost all of their money into the investments and violated one of the cardinal rules of investing, which, as we will discuss in a minute, is never put all your eggs in one basket. For Barb and Dave, things worked out poorly because they had so much tied up in these investments and couldn't get their money out. And because what they could get out was worth so much less than what they put in, they literally had to change their whole life, change all their plans and had to return to work. In fact, they spent several years working for Cindy in their own store trying to make enough money to keep themselves going. Now, let's talk about a case study where someone did very well. Frank and Marci came into get planning assistance for retiring and had no real plan for their retirement. They had some money they didn't know what to do with and all kinds of questions. We won't go into details about the other areas, but we will discuss what happened with their investment part of the plan. It was recommended they invest in a diversified group of investments in different areas of the economy. They were given quite a few choices to look at and consider based on the goals and objectives they set forth. Based on the plan and what they were trying to accomplish, they made some decisions and agreed that they should diversify their investment portfolio into various sectors of the economy. They ended up with a portfolio of different investments. They started off with slightly over $100,000, but for purposes of illustration, let's assume it was exactly $100,000.

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Another couple that came in at the same time was Arnold and Vicki. Arnold and Vicki had a similar amount of money as Frank and Marci. They came in to get help with some planning decisions but were not comfortable making any decisions. Based on the fact that they were unable to make any decisions, except to leave their money in the bank, that's what they did. Again, for purposes of illustration, let's assume they had exactly $100,000 in order to make the math easy. Frank and Marci chose five different groups or categories of investments, and within each group chose individual investments in that category. We'll discuss the five categories and show you basically what happened. They chose: 1. Cash 2. Insurance Products 3. Mutual Funds 4. Real Estate 5. Managed Accounts They put $20,000 into each category to start their investment fund. Let's look at the following table that will show you what happened over twenty years to those five groups of investments. (Ignoring taxes and commissions for illustration's sake.) Starting Value Gain or Loss 5% 7% 13% 0% -5% Ending Value (20 years) $ 53,066 77,394 230,462 20,000 7,169 $338,091

Investment

1. Cash $ 20,000 2. Insurance Products 20,000 3. Mutual Funds 20,000 4. Real Estate 20,000 5. Managed Accounts 20,000 Totals $100,000

Isn't that interesting? Some of the investments returned CD-like rates and didn't make much money. Some lost money or only broke-even. Some did pretty well. At the end of 20 years, the total value of their $100,000 was $388,901. If

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you took that and figured the annual average rate of return, the result is a 7.02% annual compounded rate of return. Let's talk about Arnold and Vicki. They took the path of least resistance and put their money in CDs. At the end of the same 20-year period, their $100,000 was worth $265,330, which translates out to a 5% annual rate of return... and $122,761 less than Frank and Marci. What happened? Why is their account worth so much less than Frank and Marci's? What happened was they didn't diversify. They put all their eggs in the CD basket, and there was no chance for the money to do anything more than what CDs are going to do. (Not to mention that the rate of return they made is only being counted before taxes and inflation! If you subtract their tax rate of 28%, and the inflation rate over this period of 5%, they actually have a NEGATIVE rate of return in terms of purchasing power! (We'll be talking more about this in a minute.) Frank and Marci, on the other hand, diversified their portfolio into five separate groups and then within those five groups had as many as four or five different investments for a few thousand dollars each - a very well-balanced and welldiversified portfolio. No one can predict the future. If we told you we knew what would happen in the investment world today, tomorrow, next week, next year, we would be lying, and so is anyone else who says they do. There are no crystal balls. No one can tell you what will happen. We would only be guessing, and guessing isn't good enough. On the other hand, you can't be like Arnold and Vicki and leave your money sitting in the bank, because we know that decision can be costly. The best solution is to diversify your portfolio based on what your plan calls for, understand the options within each group, make educated choices, keep an eye on things so you know where you stand, and make changes to your investment portfolio and plan as time goes by. Once you do your planning, many options will become apparent that fit your situation. Other options you may have read about, heard about, or been told

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about by your brother-in-law, may not fit your situation, because you will see they don't fit into your plan. Again, planning is crucial. We think, it's very important for us to point out some very critical areas of investment planning that need to be understood without going into how the specific investments work with technical details and financial mumbo-jumbo. If you are interested in learning the intricate details of how mutual funds work, or the ins and outs of insurance products and annuities, etc., there are dozens of books you can get at the library or bookstore or websites that will explain everything. Again, the purpose of this book is not to be a technical manual, but rather to be a useful manual so you can understand your choices and what you can do. We'll be talking about investment options from a planning perspective, and we think you will see this will help you a great deal in making your final decisions, once you do your planning. The first area we will cover is the one we referred to as diversification. In fact, if we had to pick one investment principle over all others (behind planning, of course) it would be diversification. Diversification is simply defined as "spreading your risk out and putting your money in different places" or never "put your eggs in one basket," as the saying goes. The ancient Greeks understood diversification. When they shipped their goods and grains to other places, they never put all of one grain on one ship. In other words, they didn't put all the barley on one ship, and all the spices on another ship because they understood that if one of those ships sunk, they would lose the entire supply of that item. They understood the benefits of spreading the risk by putting some amount of each item onto each ship. That way, if a ship sunk, they would only lose a part of that item, not the entire amount. There's nothing new under the sun. Yet, we see so many people who "put all their eggs in one basket," or, in modern terms, all their money in the bank, all their money in mutual funds, all their money in their company stock, etc. (Remember Enron?)

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Diversification is absolutely the most fundamental principle of successful investing. See, there are several aspects of risks in investing we will cover, such as the saying "The higher the risk, the higher the potential return." Diversification is different. A lack of diversification puts you at more risk yet doesn't necessarily offer you a higher chance of return. If you remember, Arnold and Vicki did not diversify, and put all their eggs in one basket (the bank), took a much greater risk, and did not get a greater return in exchange for this higher risk. And, no, putting your money in eight different banks is not considered diversification. Nor is putting all your money in one family of mutual funds, considered diversification. Diversification means your money is separated by type of investment, by category, by area of the economy or world, geographically or socially. Diversification can be based on maturities, income streams, any number of factors. Whatever you choose to do, please do not violate this rule by not diversifying. You must be diversified. Diversification equals safety. It protects you against unknown and unforeseen changes in the economy and the financial world. If things go bad in one area it is likely they will go up in another area. If the stock market is down, gold prices might be up. If CDs are paying more, bonds might be down. There's always give and take in the world of investments just like everything in life. We cannot stress enough how crucial diversification and spreading out your risk is. If you don't get anything else from this chapter, we hope this point sinks in. In today's lightning fast world of change, spreading out your investments isnt optional. It MUST be the cornerstone of your investment planning! The next area we have to be concerned with is the idea of risk. Risk is a misunderstood concept, which most people think of in the wrong way.

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People think of risk as putting money in an investment and having their principal value reduced or lost. (Like Wally and Joann experienced when they put their money into the bond fund that lost $20,000 in a few months.) All this is true of one type of risk, but we need to briefly explain how we think risk really works and how you should think of it. There are several types of risk in the investment world that we're going to discuss. Now, keep in mind that we're not trying to create a doctoral thesis on the explanation of risk. There are hundreds of theories and hypotheses on how many kinds of risk there are, what they are, how they can be measured and quantified, etc. But, we're here to talk about YOUR world and life, not some professor's viewpoint on the measurement of risk calculations. And accordingly, the discussion of risk is meant to be brief, realistic and USEFUL to you. The first type of risk we just mentioned is the risk of loss of principal. This is a pretty easy risk to understand. This is the type of risk where, for example, you put money into an investment at $10 a share and it goes down to $2 a share and you've lost $8 a share on your principal because of the change in value. These changes in value can occur for all kinds of reasons, such as, market changes, interest rate changes, economic changes, government changes in tax laws or other laws, etc.-- there are all kinds of reasons for you to lose your principal. Another kind of risk is the risk of loss of purchasing power. Or, another way of saying it is the risk that inflation will destroy the value of your money. If you buy stock at $10 and it goes down to $2, it is a loss of principal if you sell. A real loss of money. That is an easy one for people to see and understand. Even though they don't like it, it is comprehensible and makes sense. But, the loss of purchasing power, just as surely destroys your principal and causes you to lose money, however, is not understood by most people because it is not as easily seen! In the earlier Chapter 4, we talked about Grandma Hannah whose pension and Social Security income became less and less valuable, which is the same as losing principal in a stock that went down. There's no difference. If inflation causes things to be more expensive, the money you have is worth less, and it is a financial loss just like a loss from any other risk!

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The risk of losing money due to inflation is the most misunderstood and largest risk retirees face. And, in our opinion, it destroys Americans' retirement security more often than the loss of principal! Most people do a good job of investing to protect at least some of their assets from the loss of principal; however, very few people understand the risk of loss of purchasing power. We've covered the details of inflation, so we won't repeat all that here. But, we do want to stress that inflation's destructive power over your financial life and security is probably the most underestimated risk you face. Another risk people don't understand is the risk of taxation. Yes, that's right. Anything that causes you to lose money is a risk. If you lose money to income taxes, estate taxes or gift taxes, etc., you have again lost money and principal. If you sell an investment for $10,000 and paid $2,800 in taxes, and you keep only $7,200 -- haven't you lost 28% of your asset? Isn't losing 28% of your asset a loss of principal? It is no different a risk than any other, but also a very misunderstood risk. It's why tax planning is so critical and important. That's why you must use planning to figure out what your situation is and find out what tax strategies are available to you so you can reduce your taxes as low as possible. The way you invest your money will have an enormous impact on this risk of losing money from taxation. Keep in mind that this risk of losing money to taxes is very much under your own control! Unlike the risk of losing value because the principal (price) drops on a security, which is out of your control, the amount you pay in taxes IS under your control. For example, you could invest in a CD and choose to pay the maximum amount of tax possible. Or, you could choose to have money in an IRA or annuity and have the taxes on the income deferred until some point in the future. (Deferring taxes doesn't eliminate them, but the compounding effect of having an investment's tax deferred earnings re-invested, as opposed to having taxes paid along the way, will build a much larger value over time!)

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Some investments are tax-free. Things like municipal bonds, for example. Now, we're not saying one of these types of investment is better than another. We are not advocating you run out and switch your investments and savings after reading this. What we are saying is that you have to understand that the risk of taxation is real, that YOU choose how much of this risk you face, and how much you'll expect to live with. Let's review a case study where the combination of the risks of inflation and taxation were experienced, and how they can combine to cause a financial disaster. Aunt Lilly was in her early 80's when she finally decided to get help with her money. She was a very nice woman. She was very sharp, interesting and funny, with lots of wisdom to share with all. Aunt Lilly was left in a better financial position when her husband passed away years ago than Grandma Hannah was, but nevertheless was becoming quite concerned about her money. She was in perfect health, very busy with activities, went on vacations, spent time with her family, bought lots of gifts, helped out family members, etc., but, had recently begun to worry about her money. Aunt Lilly did not want to take any risk with her money. Like a lot of seniors, she thought the bank was the best place for her money with FDIC protection in the bank. While that is true, and your principal is "guaranteed" by the federal government, don't forget the loss of the value of money due to the loss of purchasing power from inflation and the risk of loss of principal from taxation that we discussed before. Her "guaranteed" and "safe" investments in the bank were actually losing money in reality. While her principal hadn't gone down, the risks of taxation and inflation have caused her to lose real money, and that is why Aunt Lily was sitting there, in our office, wondering what happened to her money. She knew the money was "safe," but she also knew she had less and less every year.

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These are risks that most people don't understand or grasp. Your accountant doesn't explain it to you, your lawyer doesn't explain it to you, because they don't understand it either. This particular combination of the risks of taxation and inflation must be something you understand and work into your retirement planning, so you can identify investments that have a chance of beating inflation and which will reduce your taxes. You must take advantage of different strategies, perfectly legal loopholes, and little known investment secrets, so you can find the right combination of things that will reduce or eliminate these two risks, keeping a lot more money in your pocket where it belongs. Another risk we talked about a moment ago is lack of diversification. We don't want to be redundant and boring, but we do want to emphasize that everything we talk about regarding investing requires this concept of diversification to be an underlying principle. You must spread out the risk and cannot afford to have all your eggs in one basket. Another quick story we will share regarding diversification is about a couple named Betty and Art. They were very modest people, both blue-collar workers in their mid-60's retiring on small pensions and Social Security. They owned a small house almost paid for, and they inherited quite a bit of money from Art's Aunt Carol. Aunt Carol worked for a Fortune 500 company her entire career, never married, didn't spend much money, lived in the same apartment her entire life, and left over $500,000 to her two nephews when she passed away. Art received $250,000 from her inheritance, all in the form of stock Aunt Carol had purchased through her stock purchase plan at her company. She used all the money from her salary she didn't need to live on, to buy more stock in the company. Her retirement plan at work was 100% invested in the stock of the company as well. She was a real company person. The problem for Art and Betty was that they inherited the stock and just sat on it for a while before they decided to do some planning. We won't go into the issues of estate taxes and capital gains taxes here in this chapter, but Art and Betty had a major benefit in that Aunt Carol had left the stock to them in her will as opposed to giving it to them while still living. Their tax basis was the value of the stock on the day of Aunt Carol's death. (The value that has to be used for tax purposes when the stock is sold.)

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Aunt Carol had literally paid only $30-40,000 (depending on whose figures you trusted because the records were so obscure) for all the stock. If she had sold it, she would have had to pay capital gains on over $220,000 of profit, which would have cost her as much as $44,000 in taxes! Art and Betty didn't have that problem because when Carol died, their share of the stock was worth about $250,000, and since they received it in an inheritance, that $250,000 was their tax basis. If they were to sell it all for $250,000, they would pay no income or capital gains tax. Nevertheless, for all kinds of reasons, they did not want to sell it. (Mostly because they felt bad selling Aunt Carol's stock in the company she believed in so strongly.) Art and Betty had very little money and could have really used the money from the inheritance. The stock certificate was sitting in their safe deposit box providing a very low dividend of only 2% that didn't help them as much financially as it could have, or should have. Yet, they were very reluctant to sell the stock because they felt they would be betraying the trust and memory of Aunt Carol. After they came in for planning, it was recommended they diversify some of that stock over a period of time and put it into other investments that would generate a much higher cash flow than 2%. They would have protection of principal, tax benefits, etc. and a much more diversified portfolio. They resisted and felt they couldn't betray Aunt Carol. You know what happened next? You guessed it One day, a year and a half later, Betty was hysterical. She just read the newspaper, and there was an article that said the company had just announced financial and accounting irregularities. This caused the value of the stock to plummet. Over a two-week period, the value of their stock dropped from $250,000 to under $150,000. They lost more than $100,000 in two weeks! Betty wanted to know about the idea of selling some of the stock at that point. When asked how this decision fit into their feelings of betraying Aunt Carol, Betty said it didn't matter anymore and they needed to protect their assets. They were advised to think about it before taking any drastic action. But, this situation, which is all too common, is really a matter of closing the barn door after the horse has long since run away. Again, we're illustrating this most important point.

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Dont put all your eggs into one basket! There are many good reasons for keeping or buying or selling investments. Emotional ties don't fall into this category. Investment decisions shouldn't be made on an emotional basis. That's another risk most people don't tell you about -- the risk of letting your emotions dictate your actions. When it comes to investments, you have to understand they are nothing more than pieces of paper or assets; they're just things. You shouldn't become any more attached to an investment than you might become attached to a piece of paper or a paperclip. It's just a thing. Your investment decisions should be made from a sound planning approach based on sensible diversification and investment principles, not on emotion. See, emotions play the biggest role in most people's investment choices and decisions. Most people buy investments out of greed, and then sell out of fear. Most people violate one of the cardinal rules of investing, which is buy low, sell high. It never ceases to amaze us how many people "wait to see what the market does" before they buy into the stock market. It's amazing, there's almost nothing in life that people will buy, waiting for it to go up and up in price, and then make a decision to buy it when they think it is sufficiently high enough. It makes absolutely no sense. But, that's how most people buy investments, particularly in the stock and bond markets. They wait to see what happens and when it keeps rising, it justifies the fact that for some reason they now feel it's okay to buy in and do so when the price is higher. The time to buy in the stock market or any investment is when the price is low. The time to buy investments, just like anything else you would own, is when the price is as low as possible, within your reasonable judgment. Wait for it to go up in price, and then sell it at a higher price. We call this the risk of greed and fear. This is not a risk you will read about in textbooks or in school studying for your MBA, but it is a real risk we see everyday. What happens when Art and Betty are suddenly faced with a huge loss of principal and now they want to sell out of fear? They may sell off after the decline in value, all out of fear, and when the investment comes back in a few

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months, or a year or two down the road, they will have lost their chance to recoup their money, because they sold out of fear. People buy out of greed when they see prices go up, and they want to jump on the bandwagon. These are all the wrong reasons to buy investments. Investments should be bought first from the context of a plan you have laid out so you know what your options are, what the effects of your investment decisions are likely to be, how they're likely to fit into your overall financial situation, and then make your investment timely so you buy as low as possible, and if you are selling, you wait until they have gone up in value and take a profit. There's nothing wrong with taking profits, and there's nothing wrong with buying at low prices. Buy low, sell high -- ingrain that into your brain. You don't want to "wait" to see what an investment is going to do before you decide to buy in. Particularly if you're waiting for it to go up. If you are going to wait, you should wait until it goes down and then make your purchase. This leads us to another point about investments that's very important. If you're going to buy any type of security, whether mutual funds of any type, stocks, bonds, etc., the concept of dollar cost averaging is very important. Dollar cost averaging is a way for you to buy investments at a regular interval, on a regular basis, putting in the same amount of money each time, and buying shares at all different prices. What normally happens is that, over time, you'll average out higher and lower prices and have a generally lower cost per share than if you bought the security all at once. So, for example, if you have $1,200 that your plan says should be in mutual funds, you have two ways to invest. One way would be to invest the whole $1,200 at one time, at whatever the price is at that point in time, and take your chances that it was the right time to buy. If the fund drops in value after you buy, you'll be aggravated that you didn't wait. If it goes up in value after you buy, you'll be pleased. But, this approach is more like flipping coins to choose your investment strategy. Heads you win, tails you lose. There's a different and (we think) much better way, Dollar Cost Averaging.

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Instead of putting that hypothetical $1,200 in the mutual fund all at once, you could put $100 each month into the fund, for twelve months. That way, if the shares dropped in price after the beginning of the investment period, you'd be buying MORE shares with each deposit. Also, if the price drop occurred after the first deposit, for example, you would have only put in a small amount ($100) that was subject to the loss...instead of $1,200! Make sense? (The following table illustrates the point.) (Note: Dollar Cost Averaging Plans involve continuous investment in securities - regardless of fluctuating price levels of such securities. The investor should consider his/her financial ability to continue to purchase through periods of low price levels. Dollar Cost Averaging does not guarantee a profit.) When you put in $100 per month and you maintain that pattern, you will be buying shares at all different prices - up, down, your contribution remains the same. When prices are up, your money will buy fewer shares, and when share prices are down, your money will buy more shares. In the following table, the investor had the choice of putting $1,200 at one time, or splitting up the investment using dollar cost averaging. If he had put all the cash in at once, he would have bought 100 shares at $12. If he spread out the risk using averaging, and the share prices fluctuated, as shown on the table, he would have still invested the same $1,200 but would have bought more shares in the months that prices dropped, and less shares the months the prices went up. In this example, the investor ends up with 223 shares, at an average price of $5.38 per share (Fund B), instead of 82 shares with an average price of $14.63 per share (Fund A)! What this process does is provide you with an overall lower cost per share than if you took the money all at one time and placed it into that same investment. It also protects you against ups and downs of prices, so if the stock or fund drops in price, you may actually be happy because you'll be buying more shares. If you think it will eventually come back up, you'll have all those extra shares at the higher price. Usually this is a much better way to invest in any kind of security than just depositing a lump sum, especially if the market is high. If the market is at all-time lows, it may be more sensible to take lump sums of money and put it in. If the market is moving down or has been-up for a while, dollar cost averaging may make a lot of sense.

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Dollar cost averaging also works in reverse when you sell securities. In the case of Art and Betty, who had a lump sum of securities they needed to diversify, it may not have made sense to sell it all at one time but rather to sell the same amount of dollars over an equal period of time, such as each month or each quarter, so they would be selling at various price levels and taking advantage of the ups and downs of the market. If they had been doing dollar cost averaging on the sales side and that big drop occurred, it would not have hurt them as badly because they would have been selling the shares over a period of time at the higher prices and could have decided whether or not to continue selling when the share prices were lower. We hope you get the idea from this chapter that investment management and investment options require mostly common sense. A great measure of common sense and little technical knowledge about investments will serve you much better than extraordinary technical knowledge about investments and little common sense. Some people in the investment world make things very confusing and complicated and the result is the average person doesn't know what's going on. Our point is that getting the technical knowledge is easy. Coming up with the common sense techniques we just talked about is very difficult and very rare. Now that you've been made aware of those techniques, hopefully you will integrate them into your planning and understand that some of these investment principles we've discussed go back thousands of years...and are nothing new. You need to also understand that "guarantees" oftentimes may eliminate or reduce one type of risk, but can cause even greater risks. The best example is bank money, such as CDs, savings accounts, etc., where you do have a guarantee of your principal, but you have no guarantees against loss of purchasing power, or loss by taxation. We are not saying you shouldn't keep money in the bank. People should have reserves and some money in the bank, but notice we said "some," not "all." You need to have a diversified portfolio and investments that will provide you the income, opportunity for growth, hedges against inflation, and give you the best chance of realizing your goals so you can have a secure and peaceful

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retirement! Using this common sense approach to investing should allow you to sleep peacefully at night, which, after all, is the whole point! Think about it. "Investment" is defined as "to commit or use money or capital for the purchase of property or a business, etc. with the expectation of profit." Diversification" is defined as "separating your money by type of investment, category, area of the economy or world, geographically or socially. Diversification can be based on maturities, income streams, or any number of other factors. You must diversify your investments. Diversification is the most fundamental principle of successful investing. A lack of diversification puts you at more risk; yet doesn't offer you a higher chance of return. Do not put all your eggs in one basket. Risk: Risk of loss of principal. Risk of loss of purchasing power, i.e., inflation. Risk of losing money due to inflation is the most misunderstood and largest risk retirees face. It can destroy their retirement security more often than the loss of principal. Risk of taxation.

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Chapter 14

THE TRUTH ABOUT INSURANCE

We're going to start off this chapter on insurance with a little story about just how much of a problem it can be understanding and dealing with insurance. We are going to give you some simple facts about insurance that you need to know and tell you what kind of insurance you should have and what kind you shouldn't have. We'll share a couple of case studies with you about people who have had problems with insurance. You can see what they have done wrong and not repeat the same mistakes for yourself. There aren't too many financial topics that aggravate people more than insurance. No one can survive in today's world without having different types of insurance. Insurance, in and of itself, isn't so bad. In fact, in many cases its necessary. But to be candid, the insurance industry has caused itself all kinds of problems because of the way it has made things as confusing as possible, and made it generally unpleasant to deal with insurance companies. It is a topic that most people have negative feelings about. So, here we are, faced with a fact of life we have to deal with. So what can you do? How do you make sure you are covered correctly and not have to put up with a bunch of sales hype and baloney? Take Fred and Carla's story for example. Fred and Carla were in their mid 60's. Fred was 63 and Carla was 62. He was a retired engineer who quit working a few months ago. Carla was a seamstress and did sewing on the side for people in the neighborhood. She's never really went out and advertised her services, but being in the neighborhood as long as she was, people knew when they needed pants

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hemmed or somebody gained weight and needed pants let out, or someone needed a wedding dress adjusted or bridesmaid gowns made up, Carla was the person to go to. They raised two kids, Bob and Cheryl. Both were living on their own with their families. Fred and Carla had six grandchildren, their most recent being born a few months ago about the same time Fred retired. When they came in for planning, they were concerned about the fact that Fred had just recently retired and wanted to know if they were set up properly. They also wanted answers to questions about their health insurance because Fred, not yet 65, didnt qualify for Medicare and wasn't sure what he should do about health insurance. They didn't know if it would be better to stay with, and pay for, the plan through work, get his own coverage, go with an HMO, PPO, etc. When they came in for planning, they were truly quite confused. They heard one thing about insurance from their brother-in-law, Tom, who is an insurance agent. They also heard about insurance from people in the personnel office at work. They read about insurance from articles in AARP and Money Magazine. They listened to other seniors and retirees talking about what they'd done with their insurance. They admitted they had no idea what to do. As we described earlier, the first thing we had to do was get a handle on where they were today. We had to first get an assessment of what they had before we could even begin to help in any way. We asked them to dig through the drawers, envelopes, make a visit to the safe deposit box, etc., and gather all their policies together to bring in. On their second visit to the office, they brought in all their insurance policies. Fred had an old whole-life policy that he bought in 1957, when Bob was born. It was a $5,000 face value policy that had a few thousand dollars of cash value still saved up. In fact, Fred was still paying the premiums on the policy that were $374 a year. He also had a bigger whole-life policy they had bought when Cheryl was born, which had a $12,000 face value. It didn't have much cash value left because they had borrowed most of it out over the years for different purposes,

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particularly for the kid's education. The annual premium on that policy was $566. Carla had no insurance on her life. When we asked them why, they said they didn't know exactly, but they had read that only the man should have life insurance since his pension is usually bigger and there's a bigger loss to the wife if the husband dies first. (Boy, wait `til you see how these rules of thumb, read in a magazine, or heard on a radio talk show, are so dangerous!) They also had a whole-life policy for $23,000 that was supposed to cover their mortgage. This policy was on Fred's life and carried an annual premium of $820. The cash value of $12,300 was still sitting in the policy. They had never touched it, hoping to save it for the future. In addition, they had two basic coverage type auto policies -- one on each car. They also had a typical homeowner's policy from the same agent they had their car insurance with. And, they were currently covered under the group health insurance plan that Bob had at work, which he was able to keep paying for, with a premium of $512 per month. That was their insurance coverage, as it existed when they came in. Now we won't bore you and go into all the tiny details of each policy. But, for purposes of illustrating how confusing insurance can be, we want to go through this with you and help you see what they were doing wrong, how they could fix it, and how their insurance problems were the most common problems people have with insurance. (Maybe the same you have with your insurance?) In order to understand what you should do about life insurance, if you should get some, get rid of what you have, keep what you have, change what you have, and so on. We need to go to the absolute basics. These are some very basic principles. Principles that Fred and Carla had not followed and needed to be thinking about very carefully. Before we start our analysis, let's go into a brief discussion about what life insurance is all about. This will be no great mystery or shock to anybody when we tell you that the purpose of life insurance, and the only purpose, is to provide money for the family, or other interested entity like a business or charity, in the event of someone's death.

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Now, within that explanation there are all kinds of people who fall into the category well call the under-insured. We can have one, or both spouses in the family who are providing income, and if they passed away, that income would be lost. This is what's known as the "replacing the breadwinner" reason for buying life insurance. There also can be reasons for buying life insurance like Fred and Carla-- to pay off debts, mortgages, business loans, etc. Sometimes people buy life insurance when they're in business so funds would be available to buy out a partners family, if one partner passed away. Life insurance can be used to pay estate taxes. Life insurance can be used to leave money behind for family members, for education and so forth. There are many reasons why people decide to buy life insurance. The bottom line is that life insurance is there to provide money when someone passes away. Thats it! The industry has developed many types of policies over the years. But, when you get right down to the bottom line, there are only two main categories of policies: 1) Cash value policies. Policies that have a savings account of some kind in addition to the insurance protection. 2) Term policies. No cash values, just pure insurance like most other kinds. If you don't use it, you lose it! In the first category, there are Whole Life policies or other forms of cash value policies like Universal Life policies, Variable Life policies, Increasing Premium Whole Life policies, Paid-Up policies, Deposit Term policies, Vanishing Premium policies, Single Premium policies, etc., etc., etc. Dozens of types of policies. In the second category, there are literally dozens of types of term insurance as well. It's called "term" because, usually, the policy stays in force for a fixed period of time, without any savings component. They can be Increasing Premium Annual Term, Ten Year Term, Twenty Year Term, (or any other

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number of years), Decreasing Term, Modified Whole Life Term, etc. The list is almost endless. The point is, while there are many individually packaged products, there are only two basic kinds of life insurance. Cash value or no cash value. That's it. They can call it different things. But, life insurance is still life insurance, no matter what it's called. They are all just variations of the two kinds that exist. That's it. Now given all that information, Fred and Carla had to analyze one question and one question only: If either of them were to die, is there a need for more money than the family currently has available to it from savings and investments?

Thats the only question. That's the only question you have to ask. That's it. Ask yourself, If you and/or your spouse were to pass away, is there a need for more money than you currently have available through your savings and investments? We'll come back to our discussion of the types of policies in more detail in a minute. Right now, we want to review how much life insurance someone needs, if any. For example, let us tell you a story about a couple who didnt need any life insurance. Let's look at Martin and Terry. They were in their late 60's, had recently sold a business, and after paying their taxes had over $1 million in cash, stocks, IRAs, pensions, etc. and were truly financially independent. When we talked to them about estate planning and their life insurance situation, they told us they weren't concerned about their three children who all had college educations and made very good money. All three of the children's

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spouses also worked and were set financially. The grandchildren's college educations were being planned for, and paid for, by their children. Martin and Terry had no mortgage on their house, no mortgage on their vacation home, no mortgage or debts on their boat. In other words, they were set. Their monthly income from their pensions and Social Security was $3,556 per month and their real monthly expenses (which they had to pay, i.e. property taxes, etc.) only ran $800-1,000 per month. They had a significant excess cash flow each month, not to mention all the money in the bank and other investments. The $3,556 fixed income they were receiving did not even include what they received from their investments. They were willing to sign a waiver with us stating that they were not concerned about their estate taxes, that they weren't willing to give up any control of their current assets seeing that they were still young and healthy, felt their children were set, did not feel they owed their children any money, and really had no reason to feel anyone would be "left behind" when they passed away. Since they didn't care about estate taxes either, this was a perfect example of a couple that really did not need any life insurance. If either of them were to pass away, the heirs would have plenty of money from their estate to take care of the taxes and have money left over. Other people may disagree and say they should buy insurance to protect the estate from taxes so their kids would get more, but in their case, they didn't want to do it. It's their choice not to care about estate taxes. Not ours. When Martin and Terry came in, they were spending $2,782 a year on some life insurance policies that we advised them to get rid of because that $2,782 a year was being wasted. They agreed, and subsequently canceled their policies. Now, that's their situation. It has nothing to do with Fred and Carla's or yours. We are just illustrating their story to point out that not everybody needs life insurance (contrary to what the life insurance industry will tell you). If someone has enough assets to take care of the survivors without extra money from the insurance, if they don't care about estate taxes, if they don't have a need for business purposes, they don't need life insurance. It's just that simple.

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But that's Martin and Terry. They are the exception. Many people do need life insurance because they either need, or want, to have more money available for their survivors when they pass away. People like Fred and Carla. In Fred and Carla's case, we first had to analyze what resources they had available, so when one of them passed away, we could project the subsequent effect on their income and assets. We had to take a look at the fact that when Fred passed away, how much money would Carla get each month from the remainder of his pension that she was entitled to, plus her Social Security income? We also needed to know how much income she would have from their current investments and savings (that total $109,000, give or take a couple of dollars.) But, before we did that, we had to figure out how much money she would need before seeing if what she already had would be enough. Now what if, for example, she needed $2,000 a month to live on (if Fred were to pass away) in today's dollars. Is there any need for life insurance on Fred's life? He agreed he'd need approximately the same $2,000 a month to live on if Carla were to pass away as well. So, let's take the reverse. What if Carla were to pass away? Fred would have slightly more money coming in each month since his pension was higher than hers. So, for right now, they would both have enough money coming in in the event of either of them dying. So would you say they don't need any life insurance? (Hint -remember these figures we're giving you are in today's dollars!) We had to crunch the numbers through our computer program to show them that if they lived to age 90 (which is a realistic way to plan), would either or both of them be OK? When we do life insurance planning, we always assume the people would die tomorrow because we don't know what other assumption is valid. (Now granted, they probably would not have died the next day, but we have to plan that way to be conservative.) Would their assets and pension be enough? Would they need any life insurance? If so, how much, and should they keep what they have?

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Would there be any difference between how much Fred would need versus how much Carla would need? Would they have enough in the early years, only to be wiped out because inflation would cause them to start dipping into their principal? These are all good questions. When we did crunch the numbers, taking into account the income they needed, building inflation into it, the assets they had, the earnings on those assets, Social Security income, pension, their debts, liabilities and so forth, the computer cranked out that Fred needed about $384,000 of coverage if Carla were to die, and that Carla needed about $295,000 of coverage if Fred died before her. (See the tables on the following pages). So the first step is always to figure out how much insurance you need, at this point ignoring what policies you have already because those are irrelevant until the right AMOUNT of coverage is determined. The graphs and tables show the picture very clearly. The graph's solid areas show their available capital while the line shows their need. The area beneath the line is their shortfall. These pictures demonstrate just how critical it is to crunch the numbers with a scientific approach. No hype, just the math. And, as you can see, their insurance needs decrease as time goes on. However, insurance is the only way to cover that shortfall in the meantime. This analysis is crucial because you may find out you're over insured, underinsured, or just fine. Whichever way it goes, at least you have the answers based on sound, prudent planning instead of some salesperson making up a "formula" (translation "guess") about how much coverage you need! That's the important part. Now we have to look at what policies they already had. Does what the computer tell them they need match up to what they had? In fact, they both had the wrong amounts of insurance, which was very important. The printouts and graphs show they were both underinsured.

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Not only that, but the policies they had were old and out-of-date policies, providing meager cash value increases, paying very low interest, with very high premiums (compared to more modern policies). So, first we established that they needed to change the amount of insurance they had. Secondly, we had to take a look at the kind of insurance they had, what kind of policies they owned, what they were costing, and whether these old policies were the most cost-effective way to handle their needs. In their case, we recommended they change the policies they had on Fred (since he was in good health) to more cost-effective, newer type policies. Keep in mind that not everyone has the option of changing to new policies, even if they want to. Their health may not be good enough to warrant a switch. Or, their old policies may be bad, but replacing them wouldn't make financial sense. The only way you can know is to do an analysis based on objective facts, not sales hype!

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That's it. In general, if you're in good health, and you want to replace your old life insurance, and it makes economic sense to do so, there would only be two reasons for you to NOT change your coverage: 1. You plan on committing suicide in the next two years. 2. You're going to lie when filling out your new application. Thats it! See, most life policies contain two provisions you should know about. One is the "Suicide Clause." Simply stated, if you commit suicide within two years of getting a new policy, virtually all companies will not pay your claim. So, if suicide's not in your cards, this shouldn't affect you. Secondly, there is whats called the "Incontestability Period." This provision in most policies says that if you lie on your application, die in the first two years, and its discovered that you lied on your application, the company does not have to pay a claim. So, other than health, there are only these two reasons to consider not replacing your coverage. (Again, this assumes that your new policies will be a better value, that theyll be cheaper, or build a better savings amount or whatever, than your old policies.) Anyway, we gave Fred and Carla two recommendations and a couple of options they could employ to take care of this insurance need. We felt it was best for them to get the right amount of coverage based on the Capital Needs Analysis and to buy a single policy on each of their lives. Once the new policies were in place and in force, they were advised to cancel their old ones. (Warning - Never cancel any existing policies until your new ones are paid for and in force. If your agent or planner suggests you do this, run to another advisor!) We showed them one way to do this using Universal Life, with a second option of using term policies that would cover them for a number of years at a fixed premium, and no cash value savings.

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We recommended both types of insurance have the exact face amount we established through the Needs Analysis. We then recommended two different types of policies with the correct amounts of coverage and had Fred and Carla choose which policy they were more comfortable with. As with any financial decision, there are always pros and cons. They chose the Universal Life Policy because they felt the savings/investment features in the policy (the tax deferred earnings, better rates than CDs, etc.) were something they wanted. They liked the forced savings idea more than paying for the life insurance with a term policy and not having any extra money going into the investment portion. Now, their choice does not mean this is what you should do! Fred and Carla admitted they were lousy savers and liked the idea of combining the life coverage with a flexible savings plan. Many other clients like the idea of "buying term and investing the difference." That is, buy lower cost term life insurance and invest the money they would have paid into a cash value policy into something else. Neither decision is, in and of itself, right or wrong. It depends on how you feel, what your circumstances are, and what you're most comfortable with. Which bring us to an interesting point. See, as we said before, there's really only two kinds of life insurance. Although there are dozens and dozens of types within these two kinds, there are two and only two kinds. One is cash value insurance, and the second is term insurance. Any cash value insurance policy, whether it's Universal, Whole life, Variable, whatever, has some sort of savings added to the premium you pay, so the money you pay goes into a savings account, which is tax-deferred, and you can borrow out (in some cases borrow it out without paying any income taxes). You are buying two things at once. You are buying the coverage you need, and you are building up a savings program. We won't go into a long boring technical description of the different types of cash value insurance here, because there are so many, we'd be here all day. But we will give you a quick guide to the different categories, so you'll at least be armed with the right info when you talk to an advisor. Whole Life: This is the most common type of cash value policy, since it was one of the first types of cash value policies. There are literally dozens of kinds

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of this type of policy and they all have minor differences. From your perspective, the most important feature to any Whole Life policy is that it has a fixed face amount, a fixed premium, and will earn some return on the cash value. Some people still have old Whole Life policies that are badly out of date and incredibly expensive compared to modern policies. Plus, many of these old Whole Life policies have an awful rate of return on the cash values. Chances are, that if you own any Whole Life that's more than ten years old, you could replace it with a newer version of Whole Life or other cash value policy and end up with much better coverage. WARNING! Many companies HATE when you replace your old, expensive, out-of-date Whole Life policy with a modern policy thats more cost effective. Why? Well, because they are making the biggest possible profit on those old policies. Listen. Even though your agent, or planner, will have to fill out replacement forms when you switch policies, which will trigger a hysterical reaction from the old company, don't let any of this bother you! If you agree with your planning assumptions and want to get the correct amount of insurance and like the new, higher value policy you're going to be switching to and you're not going to commit suicide or lie on the new application, YOURE ALLOWED TO IGNORE THE ATTACK FROM THE OLD COMPANY! You don't have to talk to them. You don't have to respond to them. You don't have to do anything with them, or listen to them. (as long as you feel you are being provided with the correct, objective information you need and that switching policies is the right thing to do). If you don't want to hassle with the old company or its salespeople, you can ask them to contact your new advisor, who will usually field the bombardment of letters and phone calls for you. Another thing your old company might do is to tell you that you shouldn't switch. If that fails, they will often come back with a proposal of switching to

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one of their new policies that's just as good or "better" than the one you have applied for. Isn't that interesting? Here they are, literally raking you over the coals for years, giving you a lousy product, and only now, when faced with replacement, they have a magical "better" policy for you. Now, here's what we advise clients to ask them every time they do this: "If you have had this new type of policy for the last seven years, why haven't you contacted me to switch to the obviously better value this new policy offers? Why did it take my working with a new advisor, who pointed out that your old policy was such a poor value, for you to magically "remember" that you have a better policy? Why didn't you contact me when this new policy became available? Would you have EVER contacted me to advise me of the better policy?" Or something like that. OK? To sum up, in general, older Whole Life policies are not very good values today. There are some newer Whole Life policies that are much better than the old style programs. Enough on Whole Life. The bottom line is that no matter what the company says, you have to either understand what you've got on your own or get help from an advisor. Universal Life: This is a newer variety of life policy that came into effect in the last 20 years or so. Basically, it is similar to Whole Life, except that it offers more and usually higher growth on your savings. For example, you can change the face amount and the premium without having to get a new policy like you would with most Whole Life products. So, if you wanted to lower your face value because something you were covering was no longer a factor in your life (e.g., paying off your mortgage) and you wanted to cut back on the life insurance costs, with Universal Life you could simply lower the face value, and correspondingly lower your premium. (Or, keep paying the same premium and build up more savings since you're paying for less coverage!)

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There are differences between the guaranteed coverages and cash values offered with Universal Life versus Whole Life. You need to make sure you compare guarantees before making a decision. Also, whether you are looking at Whole Life or Universal Life, be sure the projections of coverage and cash value growth are realistic. For example, if interest rates on Treasury Bills are 5%, we would be suspicious of a projection that assumes interest rates will be averaging 12% in a life insurance policy for the next 20 years. Like Whole Life, you can also access your cash value account if you want the money for some reason, usually in the form of a non-taxable loan. If you want a cash value policy and are willing to accept some risk of fluctuating interest rates, Universal Life is a good candidate in many cases. Variable Life: This is a new type of policy that allows you to invest your savings into any number of options afforded by the company, mostly in accounts that are investment portfolios maintained separate from the insurance company's general account. This policy design was made in response to people wanting to "buy term and invest the difference." Why? Because if you can invest in a variety of investment accounts inside the policy, get the tax-deferred interest, dividends and growth, etc., why not combine it all into your policy and make it simple? These policies have become very popular in the last few years. People like being able to control their investment account instead of just accepting whatever the insurance company gives you as interest on your savings. Now, with that said, understand that there are all kinds of these variable policies, and that some have much higher costs and expenses built right into the policy, effectively reducing your return on your investments. These policies tend to be more expensive than comparable cash value policies. But, if you make a much better return on your investment in the investment accounts, they can provide a greater increase in your savings account than the non-variable policies. Please read the prospectus carefully before investing. Again, you have to be careful and be sure to understand what types of guarantees the company provides in the event the accounts drop significantly, what expense charges they have built into the policy, and if the projections are realistic. For many of you, a Variable policy will be a good mix of needed life insurance and potentially higher returns.

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Term Insurance: Term insurance, is basically where you just pay for the insurance. Like your auto or homeowners, it's a use-it-or-lose-it type approach. They come in all flavors, but usually will lock in a premium schedule, which can be fixed or increasing, for a period of years. It's pretty simple. When you die, the company pays your family (or whomever) the death benefit. If you cancel it before passing away, you get nothing. No cash value, no savings. For some of you, this may be the best way to go. Just as long as you know your options and make an informed decision. Which is better? The answer is, it depends. In some cases, you are better off buying the cash value policies because you like the idea of having some extra savings. Maybe youre not a good saver and you want to put the money away so you know it will be there. The earnings on those policies are usually competitive, and sometimes guaranteed. Most companies are financially solvent and there is some additional protection for cash value insurance at the state level. Other people who are real good savers and investors, and feel they can earn a whole lot more money on their savings and investments, might be better off "buying the term and investing the difference." You're not going to hear this from too many people in the insurance business though. Most people in the insurance business are going to give you a definite opinion that one type is better than another, and that's just not true. That's like saying everybody should have a manual transmission car, and someone else thinking everyone should have an automatic transmission car. There are advantages to both, and there are disadvantages to both. You have to decide on the input that's given to you (hopefully the facts) so you can make an educated decision. We believe that people should know, first of all, how much they need, if any, and then decide if they want to buy some sort of a cash value product or some sort of a term product. That's it. There are no other choices. If you really don't need any life insurance to take care of your spouse or your family when you pass away, but you would like to buy some insurance to leave an estate or to pay estate taxes or leave to a charity

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or whatever, that's fine. That's a personal decision you can make and fund with cash value insurance or term insurance. We believe that you must understand how important it is to figure out how much insurance you need FIRST, and then SECOND, decide which kind of the two basic types of coverage you're going to use. You must have education and information to make an objective, impartial, business-like decision about your life insurance. All the sales hype, all the hoopla, bells and whistles, songs and dances don't mean anything. If the financial advisers you're working with aren't giving you an objective analysis of how much insurance you need, you shouldn't be working with them. And if they don't provide you with different types of policies to look at so you have options and can decide if you want to go with a cash value or term, or, in some cases - split the difference and buy some cash value coverage and some term coverage, getting the best in both worlds, you need to find new advisers. Don't fall for sales pressure and hype. We want to make it very clear that we are not anti-life insurance. What we are against is life insurance being sold to you without first figuring how much you need, from an objective viewpoint, and your not having advice and information you need on the difference products that are available. If the person you're working with tells you that you need so much insurance because you need x times your annual income, or you need enough to pay your debts, etc., that is not enough. You have to have a computer analysis to figure out inflation's effect on your income needs, taking into account your assets and liabilities, fixed income sources from pension and Social Security, and crunch all the numbers. There is no other way to do it. No, it's not perfect. No, you will not get the exact answer, because it's impossible to come up with the exact answer. All that can be done is to give you the best possible answer using the most sensible assumptions. Then you have to decide if the assumptions make sense. Look at the different "what if scenarios. Make sure you feel comfortable and then you can buy the insurance from an informed, planned approach. Anything short of this common sense, planning-based approach is not in your best interest. One last word about life insurance that actually applies to any insurance plan we mention here. Some of these policies will not be available to everyone, in

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every state. Plus, what we write about today might change tomorrow, so please check and be careful before making decisions. Another area of insurance very similar to life insurance with a great deal of confusion is...Long-Term Care Insurance. Long-term care insurance covers a great need for most people. Fred and Carla, for example, had no long-term care insurance. When we asked them what would happen if either of them went into a nursing home in the near future and they had to spend an extra $3-5,000 a month to cover those costs (which is the national average), they were quite startled. The thought hadn't really occurred to them. They had wrongly assumed that Medicare would pay for the costs, as most people do. So now that you know that Medicare pays for little, if anything, when it comes to nursing homes, and assuming you are not in the small number of people that will get the first 100 days paid for, what would you do if you had to come up with that kind of money every month? In Fred and Carla's case, since they had a fairly decent amount of savings, but certainly not enough to cover those kinds of costs for a number of years if that was necessary, they would be wiped out in a year or so. When we pointed this out to them and showed them the computer charts and graphs that clearly detailed what would happen to their estate if either of them were to go into a nursing home, and how fast they would run out of money, they became quite concerned. They agreed that long-term care insurance was necessary. Now there aren't as many options available with long-term care insurance as there are with life insurance. Although there are a number of policies out there, most have basic features that cover a certain amount of time, a certain amount of money per day, with exclusions and limitations to what they will pay. Whomever you are working with needs to show you one or two different types of polices so you can make a decision on which way to go. Most policies require you to pay a monthly premium in exchange for them paying nursing home costs up to the limits of the policy if someone gets sick and goes into a nursing home.

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At this time, many policies also pay benefits for home convalescent care. With the health-care situation we find ourselves in, it is very common now for people who don't really need skilled medical care to be at home, and because they are still confined, the policies will pay some or all of those costs. The benefits and features of these policies vary widely. We could write a whole book about those features, exclusions, benefits, limitations, but we think the important information you need to know and need to ask is under what conditions will these policies pay, how much will they pay, are benefits increased with inflation, and how long are benefits paid for? In Fred and Carla's case, since we were able to save them quite a bit of money each year on their life insurance by changing that around, we were able to take the money they used to pay on the life insurance and reposition it into paying for their long-term nursing care insurance. Fred and Carla will end up with a slightly higher insurance cost than they used to pay, but now they will have both life insurance and long-term care insurance, instead of just life insurance! (In fact, when we were all done with their plan, they had a slightly better cash flow than they used to have. They also had the right amount of life insurance and long-term care insurance, while still adding other necessary insurance coverages that we will talk about in a moment.) In case you didn't remember from the chapter about Medicaid and nursing home coverage, the U.S. Government says that about half of us will end up needing some amount of long-term care! This is one of the most overlooked risks we all face. One that can wipe you out faster than any other medical or health issue! In fact, it is very common for us to rework a client's insurance to change their life insurance around and swing money that was going in that direction to pay for some long-term care coverage. Think about this. When you pass away, and you're already retired, the loss of income may not be that substantial. And in some cases, there will be no difference of income. So, the surviving spouse may suffer some financial setback, but it usually wouldn't wipe him or her out in six months to a year.

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On the other hand, if you or your spouse go into a nursing home, it will cost thousands of dollars a month to pay for care. This can be more devastating, financially speaking, than anything else that can happen to you! How long could you afford to pay $3,000-5,000 a month for a spouse's care? For many of us, long-term care insurance is the only answer. Since you have to pay for virtually all of this care yourself until you basically go broke, if you can get a good long-term care policy, it may be the wisest shift of risk from you to an insurance company you could make! We won't repeat all the stuff we covered about Medicaid and Medicare, but we did want to emphasize that enormous problems can be solved very easily with the right policy. Let's talk about other kinds of insurance you need to be aware of. As far as auto and homeowners insurance, we find most people, like Fred and Carla, really aren't set up properly. We find they are paying too much for the wrong kinds of coverage. To sum it up in one quick phrase, "Auto and homeowners policies should be set up so that you are covered for big disasters not little things. The small claims shouldn't be covered." Here is what we mean. Fred and Carla had a $100 deductible on both their auto and homeowners insurance. That meant that any claim above $100 would be paid by the insurance company, and they only pay the first $100 themselves. But that is usually not the best move. In today's world, you are usually better off raising your deductible up to $250, $500 or even $1,000. In Fred and Carla's case, when we suggested they move from a $100 deductible to a $500, they were able to save over $427 per year on their auto and homeowners coverages. Those extra savings were used to help pay for their long-term care insurance and provided the same benefits they had regarding liability, collision, etc. Their insurance premium dollars were now being used more wisely because the long-term care need was a much bigger need than their worrying about coming up with $250 if someone broke a windshield. These policies should not be thought of to cover everything... rather they should be used to cover the big problems, the big disasters, the big accidents.

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Fred and Carla wouldn't like paying $300-400 for a claim on a fender bender, but are better covered by switching money that used to pay for the low deductibles to long-term care insurance, for example. They'd be a lot unhappier if they kept the low deductibles, and then couldn't afford to pay for the long-term care coverage when someone ended up in a nursing home! And for many retired people on fixed incomes, this is a choice they have to make. It's better to re-arrange the money being spent to get the widest possible coverages in all areas of insurable risks than to have it concentrated in areas that aren't as big a risk, or to protect against tiny problems, letting huge risks go uninsured or underinsured! You really need to explore the idea of making sure that your deductible is low enough so that you don't pay every claim out of your pocket but, on the other hand, is high enough to save you enough money to use the premium dollars you are otherwise spending in better places. Another example of how they were able to use some of these savings was to buy a liability umbrella policy that they didn't have. Their auto and homeowners policies had limits of $300,000 per incident liability protection. In other words, if someone slipped on their sidewalk, or if they were in an auto accident that was their fault, the most their insurance policy would pay, if they were sued, was $300,000. In today's lawsuit-happy society, that is not nearly enough. We recommended they look at a $2 million umbrella policy that would pay above and beyond the $300,000 of their underlying coverages. In their case, the cost of a $2 million liability umbrella ended up being $350/year, so they were able to cover that cost from the savings they got by raising their deductible...and have $2 million of coverage instead of $300,000! This is very typical of almost everyone we see. We suggested switching their auto and homeowners insurance around to provide the basic coverages, move the deductibles up higher, and reallocate that money toward a liability umbrella policy. If you don't have at least a $2 million liability umbrella, youre making a huge mistake.

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Also, make sure that your uninsured and underinsured motorist coverages are at least $300,000 -$500,000 or more, and find out if they can be increased up to your liability umbrella amounts. This is an area that can cause you tremendous loss, but most people dont understand it. These coverages provide benefits if you get into an accident with an uninsured or underinsured driver. If they dont have any, or enough coverage to take care of you, then these coverages will kick in and provide benefits as if the other driver who hit you had them themselves! Check with your agent to make sure you have enough of all the coverages mentioned so you have the right amount of protection. Next, let's talk about a real confusing topic: health insurance. There is so much going on in Congress, and the states, regarding health insurance that we couldn't possibly cover all the details of pending legislation without boring you to tears. Plus, whatever we write here about specific details will be out-of-date in a moment. All we can tell you is that it will continue to change year-after-year. And, for the purpose of writing this book, we want to make sure we cover the basics and prepare you for the ongoing changes in the future. But here's the bottom line. Just like with auto and homeowners insurance, you need to make sure you have coverage in place to take care of the big disasters. And again, we think you are much better off paying the smaller charges for office visits, some prescriptions, etc. and make sure you are protected for the big illnesses. In fact, a friend of Fred and Carla's who had just recovered from a bout of leukemia and was in the hospital for six months had a bill that was just under $450,000. That's the kind of disaster you want your health insurance to protect you against. Having a slightly higher deductible and paying for the small claims out-of-pocket can oftentimes allow you to afford the coverage for the big disasters. Today there are many HMOs (Health Maintenance Organizations), PPOs (Preferred Provider Organizations), to cover your medical costs if youre under 65 and Medicare Supplement Policies to cover the costs (that Medicare doesn't cover) if you're 65 or over. A lot of this comes down to personal choice. For example, would you rather pay nothing or little on all your office visits in an HMO-type plan in exchange for having to use only the doctors who are in that HMO?

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For some people, that's a hard decision. Today, many people who reach age 65, are going into HMO plans that will pay for their health insurance costs, including those that Medicare doesn't pay for. These plans don't charge any deductibles, many charge little or nothing for office visits, etc. For some people, if they are happy with the doctors in that HMO, it's a great way to go. Other people would rather pay for private health insurance, in the form of Medicare supplements that cover the things Medicare doesn't, and still choose their own doctors that accept payment from Medicare. Every day there are new plans coming out, new HMOs, new PPOs, and new Medicare supplement plans, so it's very difficult for us to tell you what you should or shouldn't do. Your individual situation, of course, will need to be reviewed by a professional financial advisor to give you the best advice. The most important thing we want you to be aware of, for the purpose of this book, is like Fred and Carla, you need to make sure you have all the bases covered. They, in fact, being under age 65, still have to pay for private health insurance until they reach age 65. We recommended they stay on Fred's plan from work for now, because they had a good plan, a lifetime benefit of $2 million, and were covered for things that might be considered a "pre-existing" condition, and would thus be excluded if they went on a new plan. Plus, they really liked their doctors, some of whom werent in any HMO programs. When they hit 65, they can decide if they want to go with an HMO or take a Medicare supplement at that time. There will be so many new plans out when they turn 65, that we'll have to review them at that time to help them make the best decision possible. The one thing you definitely don't want to do is go without coverage at all (can you imagine that?) or waste money on coverage you don't need or you've got coverage with low deductibles but don't have sufficient lifetime maximums. For example, some have a limit of only $500,000. We recommend any policy have at least $2 million lifetime maximum. Fred and Carla's friend, who just got over cancer, just found out that a prolonged or serious illness can be very expensive.

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So what's the bottom line here with insurance? The bottom line is that you need to have insurance to transfer risks to big, solid companies who will cover you if something happens to you. The most important consideration is to have the right kind of insurance to cover you for big disasters. You may want to look at raising deductibles so you're not paying for little things and use that savings to pay for bigger coverages such as liability umbrellas or nursing home insurance that you don't currently have. When all was said and done, Fred and Carla were actually spending less money per year on significantly better insurance with more coverage. They felt very comfortable that no matter what happened to them, they and their family would be protected. These kinds of results will never come about unless you plan correctly, sit down with your Certified Retirement Planner, CRP and get the correct objective information you need to make educated decisions. Think about it. The sole purpose of life insurance is to provide money for the family, or other interested entity like a business or charity, in the event of someone's death. There are two main categories of policies: Cash value policies: Whole Life Universal Life Variable Life Term policies (No cash value). In addition, you must look at Long-Term Care Insurance. Auto and homeowners insurance should be set up so that you are basically covered for big disasters and not the small things. The small claims shouldn't be covered. Consider a $2 million Liability Umbrella insurance policy.

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Remember, the most important consideration is to have the right kind of insurance to protect you from big disasters.

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Chapter 15

PUTTING IT ALL TOGETHER: GETTING YOUR PLAN STARTED TODAY

We've covered a lot of material and a lot of information about taking care of yourself, financially-speaking, in retirement. We've told you stories about lots of different kinds of people, what they've done right and what they've done wrong, and what we've done to help people have a peaceful and secure retirement. You've gained a lot of information. Information that many people will not tell you and that some people would prefer you not have learned. You have discovered new ways of thinking, of doing things. You've had the truth revealed to you about the investment world, insurance, asset protection, Medicaid planning, etc. You've learned a lot of things you won't learn other places, and you have an insight that most people will never get. You now have an advantage over the majority of Americans who havent read the information contained in this book. But all that information, knowledge and insight will be totally worthless if you don't start doing something about it and doing it right now. Everything we've taught you will go for naught if you don't take some action. You must start implementing these strategies in order to change your situation. A wise man once said, "Motion is better than meditation." Many people procrastinate even when they know they need to do something and take action, but they continue to think about it and delay the decision for some reason, or find excuses not to take action. In fact, in our opinion, procrastination is the single biggest enemy of retirees.

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It's the one action that is a total lack of action. Knowledge is worthless if it isn't used. Understanding and wisdom don't mean anything if they don't lead to results, and results won't happen if you don't take action. The amazing thing is that no matter how many times we say this and how many times we repeat this message over and over, and try to motivate people into taking action, many people still won't do anything. Maybe it's a fear of the unknown that paralyzes people like a deer staring at headlights in a road. Maybe they're confused, and as a result, don't want to take any action. Maybe they've listened to advice from other people, friends, relatives, and financial people that is so contradictory and confusing, they don't know what to do. So they do nothing. Maybe YOU'RE afraid of taking a portion of your money out of the bank. Maybe you've never used certain investments or savings accounts before, so they're all new. Maybe you've never really had investments. Maybe you've never really had a diversified portfolio. Maybe you've never seen all the investment options available to you. Maybe, lots of things we've discussed are new to you, so you just leave what you already have, where it is. As we've said before, the definition of insanity is doing the same things you've always done and expecting different results. So, when you really think about it, if what you're doing right now isn't working, or if your intuition or instinct or actual results tell you it won't work...then you have to change what you're doing. Doing the same things over and over and expecting new results is futile, hopeless and frustrating. What does it take to get started? Sometimes the hardest thing for people to do is just get going a little bit. Once they get started, it's like a car at the top of a hill in neutral that gets a little push and begins moving forward, gaining momentum, speeding toward its destination.

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We often find that if we can just get you to take one little action, and push you a little bit, you will start doing things. Once you start moving a little, and see how your plan and your financial life can change, you will take more actions and get on the path and move downhill yourself. What does it take? In our opinion, it's not that difficult. The single most important act for people to start planning is to actually start planning! Yes, as basic as that sounds, we've discovered that if we can help people get into first gear and take some small actions like gathering all their financial papers together, they will get the rest of the planning going in short order. So, all you have to do is get your stuff together. That means going through the drawers or boxes, looking through your folders and finding out where you've put all your policies, statements, CD and bank information, investment accounts, wills, trusts, living trusts, pension information, accounts with your children, etc. If you will gather all that, put it in a folder or shoe box or whatever, you'll be ready to meet with a Certified Retirement Planner, CRP who can start going through that information. You will be amazed at how easily everything will go from there. Many people we talk to take months and months to come into our office, just because they delayed putting their information together. We realize it's not the most fun job in the world. It's not the most exciting thing you can do, to look through drawers for your old tax returns, or looking for insurance policies you bought 30 years ago, or going to the safe deposit box and pulling out statements, policies, savings bonds, etc. But, it may just be the single most important act you'll take! It'll start the ball rolling toward your goal of a well planned, carefully thought out financial life. If you want a peaceful, secure retirement, PLANNING is the key! But your advisors can't start the planning and you can't figure out what you're doing until you know everything you have. Once you've done that, you'll see the light at the end of the tunnel getting brighter and brighter.

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Now this doesn't sound very complicated, and some people may read this and say, "Well, what's the big deal?" But, we can tell you from years and years of experience, this is a big deal - a very, very key point. It's critical that you get started. Just getting started is half the battle. Once we get you started, you can begin your new life and your new plan today. All it takes to get started is to just get started! You will be relieved to get your planning going because the act of planning is very comforting and soothing. It's nice to take a look at what you're doing now and see just how you really are set up. It feels good to see your situation as it is, and to start the actions to make sure you have the best chance of having a peaceful and secure retirement. We have seen so many people breathe a sigh of relief when they finally took the step of beginning financial planning. We have seen the look of worry and doubt disappear as their plan unfolded. We have received hugs from people thanking us for helping them get their financial house in order. Yes, it's a great feeling to start moving to a place you want to get to. So just get started so you, too, can breathe that sigh of relief! Think about it... "Motion is better than meditation." The definition of insanity is "doing the same things you've always done before and expecting different results." The most single important act for people to start planning is to actually start planning. The best plan is worthless if it is not put into action!

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Chapter 16

HOW TO CHOOSE A TEAM OF ADVISORS WHO WILL WORK FOR YOU!

As much as you may cringe at the thought of sitting down with a team of advisors to work on your financial and legal matters, it has to be done. Or as much as you'd prefer to spend your time doing something else, your financial health needs just as much attention as you give your physical health. WHY do you need a team, and HOW do you find competent professionals to work with you? No matter what you're doing -- designing a retirement plan, estate plan, tax plan, or investment plans -- you will need to hire the right people to help you achieve your goals. Your responsibility is to determine and map out your goals, and then let a competent professional team help you get what you want! First, you have to realize that everyone needs help at one time or another. It's just a fact of life. The world is so complex, and nobody, repeat nobody, knows everything. Not you, nor any other professional knows everything. That's why when you have an operation, there's a surgeon, an anesthesiologist, scrub nurses, nursing technicians, and a host of other highly trained individuals. That's because they know a team of people who are specialists in certain areas will make the procedure go like clock-work. And, they must work together to perform, even in the simplest of surgeries. They depend on each other, and you depend on them. They couldn't perform the surgery alone, just as none one of us could perform surgery on ourselves. So why, when it comes to financial matters, do most people think they can pick up an investment magazine and become their own financial advisor, accountant and attorney overnight?

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How can someone, who hasn't intensely studied these specialized fields, believe they can know it all and handle it all by themselves just from a magazine? Or from a friend or neighbor's advice? It just doesn't make sense. In fact, worse than someone thinking they understand the problem, is not being able to identify the problem to begin with! Doctors are trained to diagnose disease and cure it before the disease can kill. But the doctors don't call you up, or show up in your living room, to make sure youre healthy. It's up to YOU to call them if you are feeling any pain or discomfort. Just as if your stomach hurt and you'd see a doctor, if you think you're paying too much in taxes, you should see your accountant. It doesn't mean you have to understand all of the financial planning issues, it just means that your common sense of financial "ailments" dictates you take some action. For example, if you're worried about having enough money for retirement, this is a symptom and you should see a retirement planner. If you are worried about taking care of your family after you're gone, this indicates that you need to see an estate planning attorney. But, the trick is, many of these "financial" symptoms and matters are interrelated. For instance, if you don't manage the taxes you pay, you wont have much to invest, which may mean you can't retire, which means you may go broke, which leads you to having nothing left to leave your family and loved ones. And, you can mix up and change the order above, and the concept remains the same. One aspect of your financial life affects the other. Your best chance at NOT getting caught up in this financial tangle is by getting advice from all your advisors TOGETHER. Let them help you build a clear road map to a secure and peaceful retirement. Who should you have on your team? Although every situation is different, most individuals need a group of competent professionals to work together in achieving optimum results for you. In general, you should build a team of advisors who can work together and strive to achieve the same goal... YOUR GOALS!

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But so many people become fearful or neglectful of putting together their own team of people who can stabilize and secure their current and future financial well-being. Many people don't understand the complex financial and tax matters of our society! Many are afraid to seek help, because they don't know what to ask. Many don't know how to find a good team of advisors. Many don't know what duties to give to each team member!

It is difficult, we'll agree. But in general, most individuals who are concerned about a peaceful and secure retirement should, at a minimum, work with: a Certified Retirement Planner, CRP, an accountant, an estate planning attorney, and/or an investment counselor. This is a pretty good team to start out with. Later, as most others do, you may want to add business advisors, other attorneys, bankers and such to help you out even more. The biggest thing to remember is not to cut corners. Don't think that your attorney can give you great investment advice, or that your insurance agent can best decide how to structure your deductions for tax purposes. And most of all, the professional who claims to know it all probably knows very little! If you don't already have this team of advisors in place, then you may want to ask some friends or relatives whom they use. If this doesn't work, you can always find someone through associations such as the local bar, or CPA associations. They can help you find some advisors with whom to meet. And, because you are hiring them to handle an incredibly important job for you, interview them first. Make sure each individual has what you're looking for and will do the job for you! Who Should Be In Charge? Other than you making the ultimate decisions, once you've been given all your options to weigh, you'll typically need someone to run the show. Depending on

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how you approach planning, and whom you've worked with the longest, one of your advisors will most likely serve in the leadership role. This leader should help you coordinate the various tasks and responsibilities of each advisor. This leader will be the quarterback just like in football. Your financial quarterback should walk you through the process. This leader will be different for each individual. It may be your accountant, the estate planning attorney, or the Certified Retirement Planner, CRP. It doesn't really matter, as long as they have "what it takes to take charge. And when we say ``take charge'', we mean the one who makes sure things are done according to YOUR wishes. It does NOT mean the retirement planner tells the attorney how to draft documents or tells the investment planner which investment to pick. Each advisor needs to carry his or her own weight and be allowed to do the job they were trained to do. And the end result should always be to get YOU to where YOU want to be! How should the team of advisors work together? Well, first and foremost, all of your advisors need to talk to each other. This sounds so simple, but it so rarely happens! And many times it's not the fault of the professional. Most people go to an accountant for one thing, see their attorney for another, and get investment advice from someone else, without seeing how one will affect the other. The fact is that they absolutely affect each other, and it's critical that each of your planning elements be tied together. Think about it. When was the last time your attorney, accountant, financial advisor and insurance agent all sat down together, or conversed over the phone, to make sure that they were working in harmony to achieve your goals? The answer to this question is typically, "Never!" Although you have different types of planning with each of these individuals, they can't be treated separately. They interrelate and depend on each other, so you must treat them as such.

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If you want your planning to be orchestrated to achieve your goals, these goals and your planning will never come together if your team doesn't work together. What happens if they don't get along? If you're advisors don't work well together because of their egos or personalities, replace one, part, or all of the team. It's not your problem if they can't get along, but it will become your problem if you let it continue. You'll never get what you want or reach your planning goals if this happens. And, keep in mind, they work for YOU! Take Carl and Joanne, who wisely acted upon putting a team together to help them plan every facet of their finances. They found a real smart estate planning attorney, John, who consistently kept up to speed on all of the new tax journals and regularly updated and advised his clients of any recommended changes to benefit their tax planning. John ended up having to deal with another one of Carl and Joanne's planners. This planner, Gus, was an accountant who really was not a planner of any sort, he just basically knew how to fill out the forms. He hadn't really done any true tax planning since he graduated about 20 years ago. But, he was a friend of Joanne's mother's church group, so they chose him as their accountant. One day, John read about a new strategy Carl and Joanne could use under a new tax law that had just passed, so he gave Gus a call to fill him in. Guess what? Gus hadn't even heard of the new tax law, let alone try to come up with a strategy for using it! John decided to go over to Gus's office, and tried to explain the new tax law. Gus looked very confused. John could tell he didn't know what was going on. As John tried to explain the strategy, as human nature would have it, Gus nodded his head and acted as if he understood the situation. He didnt. He didnt have a clue. But, he didn't want to look stupid! When John was through proposing the strategy, he asked Gus what he thought. Seeing as he couldn't admit that he didn't know the answer, he replied, "Oh, well, uh, yeah. That may work for some people, but not for Joanne and Carl." Puzzled, John asked why he thought so.

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As Gus buried himself deeper in his cover-up of lack of knowledge on the subject, he commented, "Well, uh, I think it sounds too aggressive. I don't think that's what Joanne and Carl want." After they got into a heated debate, and John stormed back to his office, neither one had decided who might be the one to ask Carl and Joanne what they thought. And, neither one called Carl or Joan. And there they were being hit with higher taxes because no one bothered to get their opinion! When Carl and Joanne caught wind of the argument from their insurance agent, they called both John and Gus. Each one defended their side of the story. But that's not what Joanne and Carl cared about. They couldnt have cared less about who said what to whom and so forth. All they wanted to know was about the possible strategy to avoid the tax! That's it! After John filled them in on the new tax law, and ways around it, they decided to keep John on board. After all, he sure knew his stuff! And, he did try to explain it to Gus. However, their personalities clashed, which almost led to disaster. They fired Gus because he seemed rather inept. And Joanne and Carl are thankful the insurance agent clued them into what was going on. Could you imagine if they still didn't know today and they kept paying more unnecessary taxes? Actually, there are two significant problems people face when putting their team together: 1. The client thinks that only one advisor is enough. They think this advisor knows about all areas of the tax law, investments, insurance, etc. From what you've read, you know this is not the case. 2. Many advisors are quick to say "no," and take the safe road of inaction, rather than help the client achieve their goals. They don't want to risk being held liable for giving some wrong advice. Well, how would you feel if you went to the doctor, and instead of hearing about all the new and alternative treatments for cancer, the doctor kept his mouth shut? Or, if the doctor heard of a new pill you could take to kill the cancer, but didn't tell you? It's your life and you should decide what risks you'll take.

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If your team of advisors does not have an open mind to new planning techniques, it may be as bad as the doctor example. They need to constantly keep up with the times and keep you well aware of any changes, strategies, alternative options, and so forth. If your advisors don't stay up with the changes in their fields, how can they properly advise you? And, that's what you've hired and paid them to do, isn't it? Here's the deal: For each person you hire into your team of advisors, go beyond that person's title. Make sure they have the experience and credibility to help achieve your goals. In fact, it would be a good idea to get some references from them. See if they're willing to share any, and ask those folks how pleased they were with that particular person. It's just like an interview -- get to the heart of this person, check them out thoroughly, check references, and then continuously monitor their work. If they excel, you keep them. If they're lazy or inept, you fire them. Who really is the client? Youre the client, not them! You are doing them a favor by hiring them. NOT THE OTHER WAY AROUND! They work for you, not the other way around. But, as you're sure to encounter, some advisors would like to make you think it's the other way around. Unfortunately, there are advisors who treat their "clients" poorly, mainly because of their egos. They think they are the ones in control, and that you're lucky to have them. However, you have to remember that YOU hired them! If you hadn't, or others hadn't, they'd go belly up, or you'd find them begging for business. Maybe then they'd remember who works for whom. There should always be a mutual respect for all parties. Your advisors should serve you, but not be your servants. They should be able to advise you without you forcing them into it, or without them forcing you to do something that you don't want to do or don't understand. And don't let them intimidate you. Some will, on purpose, to show off their knowledge. Most don't. Some people perceive knowledge as intimidating, because they are the intimidated by their own lack of knowledge and understanding.

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In summary, various people are needed to help you achieve your goals. You need every element of your planning to be backed by competent individuals. And all of these individuals need to be up to speed in their specialized fields and keep you informed along the way. Although they have different and very distinct responsibilities, they all need to work closely together for you. Like a good military operation, surgery or team sport, no one can do it all on their own, and everyone must understand the goals and work together to get them! Think about it ... You will need to hire the right people to help you achieve your goals. Your responsibility is to determine and map out your goals, and then let a competent professional team help get you what you want. You need to build a team of advisors who can work together and strive to achieve the same goal... YOUR GOALS. Remember, YOU are the client, NOT THEM! They work for you, not the other way around. Other than you making the ultimate decisions, once you've been given all your options to weigh, you'll typically need someone to run the show. Depending on how you approach planning, and whom you've worked with the longest, one of your advisors will most likely serve in the leadership role. There should be only one lead advisor.

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Chapter 17

HOW TO DEAL WITH YOUR FAMILY AND INVOLVE YOUR HEIRS WHEN PLANNING YOUR FINANCES

The subject of this chapter is difficult for many individuals. When it comes to retirement planning, chances are you'll need to involve your family. And when it comes to estate planning, you'll certainly need to involve your heirs! This is tough, because in some families members are very open with each other. And others are very private. However, each family must decide how much information it will share with the other family members. The reality is that in order for your retirement planning to work, you must make sure that somebody else in your family has an idea of what you're doing or at least be able to find out. As you've probably read or heard about, there are many unclaimed bank accounts and missing assets. You know why? Because when someone dies, their spouse or the kids have no idea what assets exist, let alone where they are. Without that knowledge, billions of dollars go unclaimed! The insurance companies also have billions of dollars of unclaimed life insurance, because nobody ever filed a claim once the policyholder passed away. It's not the insurance company's responsibility to track their policyholders. And if the kids or spouse don't know the policy exists, they don't know to file the claim. The same is true with bank accounts, investments, safety deposit boxes, etc. Are you willing to let your assets go unclaimed, simply because you didn't discuss your financial situation with your family members or heirs? If you are not comfortable with telling your family and heirs what you own, there's not much anyone else can do about it. But you should at least have a method of informing them if you become disabled or die. You can leave

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instructions, such as "all of my important papers are in the safety deposit box at Main Street Bank." Or, "If anything ever happens to me, my attorney, Sue Smith in Anytown, U.S., has my records." Just taking a few minutes to leave instructions can certainly benefit your family later, even if you never get around or desire to discuss them with your family. Actually, some situations don't require family meetings. You probably don't need your kids to fly in from wherever they are to find out which auto insurance you chose. You can certainly tell them, or keep a record of it, but it wouldn't be necessary to involve them. And just the opposite, there are times when it is prudent to involve your family. For instance, often times estate planning matters involve the input of several generations of your family. Estate planning has a domino effect. What you do affects your children, which will affect your grandchildren, etc. Many times estate plans are coordinated at several generational levels, meaning you plan so that the funds still exist forty years from now. And without coordination between the family members, those assets could unnecessarily be taxed, mismanaged, or forgotten all together! If you want, you can involve your family in all sorts of ways, to varying degrees. It's up to you, but you should, at a minimum, seek the advice of your advisors and make sure youve given your family and loved ones enough information to carry out your wishes if you aren't able to. Privacy is one thing, but don't cut out your family and other loved ones. Up until more recently, it was typical for the husband in the family to deal with the financial affairs. He'd set up the mortgage, pay the bills, handle the investments, do the tax returns, and such. And, just as typically, he rarely discussed these matters with his wife or kids. In some families still today, neither the wife nor the kids know whom the accountant or the attorney is that the husband had been using. The mother of an acquaintance of ours fell victim to this. She had no idea what her husband had done, or not done, with their financial affairs. Well, a year after he passed away, she got another shock. She received a letter from the bank, telling her that the $75,000 balloon note on the home mortgage was due! She hardly knew what a balloon was, and had no idea that her husband set it up that way.

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She had to scurry and figure out how to pay off that $75,000 the bank wanted from her. She ended up having to refinance the house, which disrupted her whole financial picture. And needless to say, it knocked out the possibility of retiring early and shook the foundation of having a secure financial future. Now, would you want to leave all sorts of problems for your family to figure out, or even be shocked or angry about? Of course not. Don't make your spouse or kids go rummaging through desk drawers and old boxes trying to figure out the family finances. There is a very good chance items will be missed or overlooked as happened to our friend. Historically, women outlive men by several years, so it's in everybody's best interests if at least the husband and wife are involved in the planning process. It affects both their lives, so really there's no room for questioning why it's so important. And, at a bare minimum, these folks should inform any children or heirs, or leave specific instructions. Your best bet is to involve the entire family, ask questions, and share your concerns. Because it's so uncomfortable to discuss what will happen if someone gets sick or dies, a lot of families avoid the topic all together. And by avoiding it, the family then also avoids making planning decisions that will soon affect one if not all of them. But, if you have a plan, and you make sure you let everyone know what's going on, it will make things a lot easier on everyone in the long run. Now as crass as this may sound, we can't avoid the possibility of becoming disabled, terminally ill, or dying. And we all know that death will occur sooner or later. And sometimes the pain and suffering of the death is a little more bearable when the survivors don't have a giant financial mess to straighten out. The pain of losing a parent is often magnified by the problems that the parents caused by not planning. Why?

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If the parents do no planning, and don't share information, their estate becomes a burdensome mess! The children have to unravel a mystery. They end up running around, missing work, making phone call after phone call, searching through old boxes of stuff, all in order to figure out what in the heck the parent had done! And this common chaotic mess can be so easily avoided. And on top of the financial mess, this poor planning on the parents' part can many times lead to sibling rivalry and vicious disputes over trivial items or events. It's not unusual to hear, "Why is Mary handling the estate? She can barely balance her checkbook!" Or, "I never trusted my brother, he was always mom's favorite... Im going to make sure he doesn't get any of the antiques!" Or, "Mom didn't leave a will, so I better go in and get the good jewelry before that no good sister-in-law of mine steals it all away!" Or, "We took care of dad for the last five years of his life. We were over there every day, washing him, feeding him, and spending our time and money to keep the house up. We should get most of his estate!" As ridiculous as it seems, these jealous, angry disputes erupt all the time... mostly because the parents didn't plan ahead of time for what would happen to their estate when they passed on. Whether youll admit it or not, most people tend to react this way. When the parents are gone, their binding influential element is gone too. It's human nature, and if the parents don't plan, they can in turn make these feelings grow and fester. So to all you parents out there, let's make a conscious effort at planning your financial future. Design a plan that will achieve your financial goals today, and after you're gone. Share your plans with your advisor or your family, so someone, if not everyone, knows what's going on. Think about it. When it comes to retirement planning, you will need to involve your family.

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When it comes to estate planning, you will need to involve your heirs. Your best bet is to involve the entire family.. ask questions, and share your concerns. Make sure you let everyone know what's going on, it will make things much easier on everyone in the long run.

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Chapter 18

SOME PREDICTIONS

Nobody can predict the future, so we're not even going to try. However, we can explain certain things that will always occur. Because our economic environment is constantly changing, it is critical that any plan you create be modified and kept up-to-date as things change. Your planning will not change on its own accord. You have to be conscious of our ever-changing world, and make sure your plan coincides with these changes. We can also tell you that retirement planning doesn't end at 65. You may live thirty or more years, so you'll have a lot of reviewing and managing of your assets! Imagine if you had the same financial portfolio today as you did thirty years ago. Thirty years ago, $40,000 was the price of a home. Today, that same amount may buy you a semi-luxury car. And thirty years ago, you probably never would have imagined the computers, space stations, 9/11, Enron/WorldCom type scandals, political changes, the dot.com stock price rise and subsequent crash into oblivion, 7000 pages of tax laws no one understands, taking your shoes off at the airport, 1% money market funds, and so on. Would you? Now try to imagine what it might be like thirty years from today. Do you see why it is so critical that you adapt to the changing environment? Even if you set up your retirement plan ten years ago, youd better not be relying on it for any type of security if you haven't updated or changed it since then! You have to constantly ask yourself, "Has my financial situation changed? Has my health changed? Has my family changed? Have the tax laws, inflation, or the stock market changed? If you remember to do this one little thing, you'll get HUGE results. You'll be able to keep up with the never-ending roller coaster ride that our economy offers.

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In fact, if you addressed your finances only a year or two ago, think of all that's changed since then! There are hundreds upon hundreds of new legal and tax changes each year! Is your plan up to speed with all of them? We're not saying that reviewing every little detail of your financial portfolio needs to become a daily event, but it does need to become a regular event. You probably know well enough to see the doctor at least once a year for a check-up to see if anything's wrong. It can be a quick appointment, a quick blood test, some exams and you're out of there, knowing that everything's fine. But, if everything isn't fine, you've detected it early enough to get proper treatment. If it's something like high blood pressure, you'll take some blood pressure medicine and follow your doctor's advice. And you'll live a longer and healthier life. However, if you forgot or made excuses to avoid going to the doctor, that high blood pressure could cause a heart attack or stroke that could ruin your life, or even kill you! Even if you're feeling fine, you could have some underlying problems that can't be detected without a diagnosis. The EXACT same thing goes with your finances. Changes will always occur. The risk that these changes can ruin your financial health will always be there! But. The opportunity for you to monitor your financial health is always there! Monitoring your financial situation becomes very easy, especially if you compare it to the difficulty of running out of money at age 80 and having to rely on welfare or your family for support. This is very real, and very serious. Retirees running out of money is not something to make light of. It's becoming far too common. Retirees become their own victims from lack of planning and action. Being flat broke is not an experience most of us would like to have. Yet, if someone neglects to skillfully plan, and monitor the plan, they are certain to become his or her own worst financial enemy.

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Let's not let that happen. If you position yourself wisely today, and monitor your plan the rest of your lifetime, you can ensure a peaceful and secure retirement. Now, here are some predictions that you can either choose to agree with or argue against. But at least they will get you thinking, and that's the whole point. These are things that we feel certain will occur and change: Tax laws will change drastically, and will most likely change several times over your lifetime. Tax rates may go up, they may go down, but they will definitely change. And many of those changes will directly affect YOU. If you don't follow them closely, you will need to get others to help you monitor their impact on you. Social Security, Medicare, and Medicaid will go through some major changes. Some think Social Security and other government-run programs won't be around because they're going bankrupt due to increasing life expectancies. Or, if they manage to reform the program, it will provide limited benefits. The government keeps reporting that Medicare eventually will be broke, so obviously something has to change. But if not, you have to make sure you don't go broke along with it. Ask yourself, are you relying on the government to take care of you when you retire? You may want to think again, because the money to help you out just may not be there. People will be living longer and longerwith higher and higher health care costs to go along with the increased longevity. Inflation and the cost of living are bound to keep on changing. No one can predict what will happen for sure. Although one thing is for sure, things will definitely cost more in the future than they do now. Prices and the cost of living have always gone up and will continue to do so. The question is, are your investments keeping up with inflation? Are you breaking even, or are they losing ground? Find out today how well you're investments are doing after figuring in the inflation factor. Families of tomorrow will most likely become more diverse, and require more diverse planning. The divorce rate in the last twenty years has been the highest in history. And because of these reorganizations of the family group, it's not unlikely to see second and third marriages, with stepchildren and stepparents

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and step grandparents. This calls for some personal evaluations: How do you treat children equally when they may not be blood relatives? Does it matter to you? Do you understand the different legal rights that each of these family members has? The future will be dynamic. Things will always change, as they always have, so that's nothing really new. What's new is our awareness of how preemptive our actions need to be in regards to keeping our finances up to speed with all the changes! Our seniors and retirees right now are paying the price for not having this awareness brought to their attention years back. Many are operating off old investment and estate planning ideas that aren't holding up in today's economic and tax climate. Unfortunately, as the government kept changing things, our older generation wasn't always advised to adjust its planning. And look around. They're desperate and they're scared. They see their hardearned money slipping right out from under them, and they can't do a darned thing about it. It's too late in the game. But you are aware. You are conscious. You are ambitious. And you know how important retirement planning is both for now and for the future. So gather all of these elements together, and put them to work. Take control of your financial destiny today while you still have the chance. And after you're done realigning your financial situation to match today's needs and your wants for tomorrow, you will then be on the road to a secure and peaceful retirement. You'll be able to take a deep breath, relax, and relish in knowing you've done what you could. And that's more than a lot of people can say or feel comfortable about. But there's still one job left: Take the time that you have, appreciate it, live it to the fullest in good health, and enjoy your retirement! Think about it. You have to be conscious of our ever-changing world and make sure your plan coincides with these changes. Tax laws will continue to change drastically.

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Social Security, Medicare, and Medicaid possibly won't be around because they will be bankrupt, reformed, or they will provide only limited benefits. People will live longer, and as a result health care costs will continue to skyrocket. Inflation and the cost of living will continue to rise. Families of tomorrow will continue to become more diverse. Take your time and enjoy life, live it to the fullest in good health, and enjoy your retirement. YOUVE EARNED IT!

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Conclusion

HOW YOU CAN SIMPLY AND QUICKLY END YOUR MONEY WORRIES THROUGH CAREFUL PLANNING

Well, we've come a long way! We've talked about the most important financial issues facing you, how they affect your life, and we've told you what to do about them! We know we've covered a ton of material, and you may have a lot of questions about how all this newly found knowledge applies to you. Now, there's only one way to really figure out what options and choices you have available to you! You're not going to be too surprised when we tell you what it is... Planning for your situation! Not too surprising, huh? After talking about planning throughout this whole book, we are now reminding you that the best way, the only way, to make sure your finances are on track, is to start planning right now. If you delay, procrastinate or otherwise do not get started, you're making a big mistake! If you want to know if you're OK, if you want to know if you're doing things right for your situation, if you want to know what choices you have so you can make educated decisions, you must begin to plan right away! Times-a-wasting! Every day that goes by without you operating from a solid plan, is another day that you lose out! Every day that passes without you knowing what you're doing, where you're going, and how you're going to get there, causes you to take more risk with your money than you should!

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If you want to be able to sleep well at night, knowing that you've reduced your risks, knowing that you have a sufficient cash flow and enough money to last, planning is your best shot. There isn't any other way to maximize the chances of reaching whatever financial goals you have set for yourself. As the slogan from Nike goes, Just Do It! Take care, and we wish you all the peace of mind and security imaginable!

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