Chapter one, preface.
There are three types of money. Each of these first three chapters will each describe. each type of money. At the end of these first three chapters, there will be a brief summation of “how all three types of money, fit together”. For simplicity now, let’s view, these first three chapters, as for a person, who has already built up a nest egg and is in retirement status
(retirement status, let’s define as someone who is planning to retire within ten years or who is already retired. So, if someone wanted to retire at age 65, he would be in retirement status at age 55. The view is different as you get older. It is a different view, once you are retired, looking down from the mountain you are on, vs, being age 25, looking up to the mountain).
Let's begin with chapter one

Chapter one, your “A” type of money. “A”- type money is for you to have an “Accessible” emergency fund (have a liquid capital reserve)
As we mentioned in the introduction, the purpose of this book is for you to be worry free. If have a liquid capital reserve fund, and any type of emergency or urgent need that comes up, you do not have to worry about where the funds will come from (you already have the funds set aside, for this need. No worries as to where/ what fund, am I going to get the funds
from).

Having an emergency fund is not doomsday thinking. It is just very practical thinking, because there will be very predictable immediate needs that come up (we just don’t know when). Events like home maintenance repairs, car maintenance repairs and deductibles on insurance (home, car or health insurance), these type expenses come up all the time.

Also preplanned purchases you're going to be making within the next year need to be set aside, in this type of account also. Let’s say you need $40k to do a home remodel, like adding a back porch or kitchen remodel. That $40k should be positioned in a liquid, safe accessible fund, so when the time comes, those funds are there, to accomplish the purpose of what they were set aside for (a year time frame, is a short period of time).

How much should I have set aside for an emergency account? Each household is free to decide, what amount they feel comfortable with, but an AARP survey, conclusion that every retiree household, should have at least $10K, on hand for emergencies (but only about 10% of the people ever needed to exhaust all $10k in one year). What if I exhaust all this $10k in one year, then what (if your emergency gets depleted, we will
discuss this in chapter three). Also, side note here, if you are not already retired, it is recommended you ,have an amount equal to, several months of living expenses, set aside in an emergency account, for the purpose of ,if you lose your job, this emergency funds will fill the income gap, giving you time/until you secure new paycheck employment.

Problem: I certainly do not want too much in an emergency account, for example in a checkbook account, because banks aren't paying much in interest (so I am not getting too much growth on my money).

Solution: to make educated, to make efficient and effective, your “A” -type of money…. Keep reading.

Your "B-Type" of Money

This chapter is to educate your “B” type of money. “B” type of money, stands for your “Brokerage” accounts (or any asset that's usually bought through a broker). “B”- type assets are “at risk”/ volatile growth or income assets. “B”-type assets can go up and down in value. When the average American household thinks of a brokerage account, they usually think of purchasing stock, but in this category, it’s any asset that could go up and down in value (even any and all speculation type assets). Bonds are also in this category, since bonds can also lose value problem. With “B”-type money, it can lose value, therefore it can cause stress, anxiety and worry,
which can cause losing your health. “B”-type money certainly needs to be well diversified, with regular monitoring/assessments and have a written exit strategy.

Problem: we know these accounts can lose value, but is the typical brokerage account liquid? Yes, for example stocks are usually liquid, but for example, let's say if the stock market (your brokerage account) goes down 50% and you need cash out from this account (for emergencies or just retirement income to live on). Taking money out of a stock account, after it's just gone way down, that might not be the most ideal time, for withdrawal (because then you may not have remaining funds, remaining in the account, for that account to grow back). So, liquidity is here, but the liquidity timing may not be here.
Solution: keep reading

Your "C-Type" of Money

Your “C” type of money stands your “Constant value” hybrid growth and income assets (we will call these, Principal Protection Programs/ PPP).
Now with all assets, we want to get significant ROR “Reliability of return” or ROI “Reliability of income”. That is exactly what you receive, when you have properly structured PPP’s.
Constant value means fixed value; the value cannot go down in these accounts. These are hybrid accounts, with steady and significant, only upward growth or income. Applicable market upturns are retained (usually on an annual basis) and a new principle is established every year (usually on an annual basis). You can never lose principle, with “Constant Value”-
type money.
As we mentioned earlier, Growth is usually more focused
on, in the pre-retirement years, where “income “is usually
more focused on, once a person gets into retirement status
age.

What is a hybrid. Well in “C”-type of money, a hybrid is an account that's safe, but also can get significant growth. Hybrids came about, because look at the three types of financial industries. There is the banking industry (a safe industry), there is the insurance industry (a safe industry), and there is the securities industry (an” at risk” industry). Well banks and insurance companies started buying/ owning securities firms,
but then the security firms started buying /owning banks and insurance companies. This resulted in a lot of these “hybrid” products becoming developed. There are some clear lines, such as, if the investment can lose money, it has a prospectus (given at the time of purchase, which states, this investment, can lose money). If the investment cannot lose money, it has no prospectus. So, you can distinguish between what industry you
are dealing with.

There is no “ideal” investment. They’ve often said, if money grew on trees, that tree would be a very bloody place (because everybody would be after it). Same thing, if there was an “ideal” investment, everyone would have it and there would no need, for all the other types of products. A sign in a retail clothing store read (we have three departments): high quality,
good service or low cost …choose any two. So, each of these three types of money, also, each have specific tradeoffs.
When looking at the three types of money, here are the three tradeoffs: liquidity, safety of principle or “at risk growth”. Just like the clothing store, you get to choose any two.
So, keeping it simple:
“A”- type money is “Accessible” emergency funds (for simplicity, we will call this a checking account) it is safe, it is liquid, but it doesn't grow very much.
“B”-type money, brokerage accounts, they can go up and down in value, so they do not have safety, but they do have liquidity
“C”-type money, Constant Value / Principal Protected Programs, have safety, have significant growth, but they may not be entirely liquid 100%, until maturity.
So, as you can see, each type of money has its tradeoffs.
Problem: some PPP’s may not be 100% liquid (until they mature)
Solution (for PPP liquidity): Once a PPP is mature, then they can be 100% liquid accessible. Therefore, these PPP could then also function as “A “- type money. Conceptually, in any applicable year, any PPP can get double digit growth. That can be a good return, without risk. Once matured, then funds can become 100% accessible. With many types of PPP, you can then keep the program going past the maturity, then they can keep continuing to grow further, therefore at maturity, with many
PPP’s, then these funds can now become excellent for “A”- type money also (all maturity can mean, is that there are no more, penalties for early withdrawal).

Your "C-Type" of Money

ABC's All Together

How does all three types of money work together?

“A”- type category of money is, money “Accessible” for emergencies.
“B”-type category of money is “Brokerage accounts” (primarily stock accounts) and
“C”- type category of money, is “Constant value” assets for growth and income/ principal protected programs.

These three categories of money should all be properly structured and well diversified, within each one of these categories. Diversification means you’re not putting all your eggs in one basket. Ecclesiastes 11:2, show the importance of diversification. We also believe there should be periodic reviews / assessments, monitoring your financial plan (annual reviews). Position your money into each of these three categories of money, according to your priorities and the purpose of each category.

How does one go about determining how much of their nest - egg, is to go in each category of money. Well each person can obviously determine what percentage of their nest egg they want to allocate, into each category (as to what they feel comfortable with), but there is a financial law, called “the rule of 100”. You could call it a rule of thumb, but with any type of law, you never want to ignore it. Like if you ignore the law and drive on the wrong side of the road, the result might not be ideal. The “Law/ rule of 100”, is designed because as people get older, they move more into a safer position. The “rule of 100” states: take 100 minus your age and that should be the approximate percent, that you should have your nest-egg, in an “at risk “position. So, to put it another way, the “rule of 100” states, whatever a person’s age is, that should be the approximate percent of their investable assets/ nest-egg, that they should have in a safe position. So, for example, to illustrate the “rule of 100”: if a person was age 60, utilizing the “rule of 100”, they would have 60% of their investable assets in safe investments, like “principle protected programs” and then remaining 40% of their nest egg in “at risk” money positions.

A person may ask, what about my home, where I live in, what category does that fit in? The three categories of money are categorized “investable assets”. “Investable assets” are assets that can be turned to cash, relatively quickly, and so real estate would not go into category “B” or category “C”. If people are buying income producing property, we will certainly talk about that in Chapter 9, the “I” for income chapter.

What might the “rule of 100 “look like. Let's say a retiree, already retired, has a nest egg of $550k. Let's say they wanted to have $50k in “A”-category of money, an emergency fund. That would leave $500K remaining, to go into category “B” or category “C”. Using the example of the person that's age 60, therefore approximately 60% of that $500k (or $300K) would go in category “C” (category “C”, being PPP’s) and the
remaining 40% (or $200k) would go in category “B”, the brokerage accounts category.
Let's take a look at this (the positioning, in the above- mentioned paragraph), if there was a 50% drop in the stock market, which would only affect your “B” brokerage account to go down 50%. If you were following the “rule of 100”, in the above example ,you would only have $200K ( of your $550k nest egg) in an “at risk” position and if that “ at risk “ account,
went down 50% , you would lose $100K ( as compared if the entire nest egg was in the stock market ,you would have lost over $250K). So, with these three categories of money all working together, utilizing the “rule of 100”, there are no more surprises. You don't have to worry about market volatility, like if a “terrorist act” were to happening, that then might cause
the markets to immediately close, of where if the markets were to immediately close, then none could get in or out of the market (since it closed all the sudden), so your nest- egg is cut in half ( of where with the market , getting cut in half, of where you would now have a “now what” moment). With money mapping, no more “now what” moments, because with these three categories of money working together, puts in control.
You always know what your value of your nest egg is, you never have to guess again (guessing, how much could I lose, will I have enough to retire etc.). Now with you being in control (now knowing what you have “at risk”), you can now be more worry-free.
By doing annual reviews, you may want to rebalance (rebalance what dollar amount to put into each category of money). As we've already mentioned, if your “A”-type money has been depleted, you can fill that back up (by then moving some “B” or “C”-category of funds, into the “A”- category of funds. Why, replenish “A’ category of funds, so you can always have “peace of mind”, for if emergencies arrive, you know from what account to take money out of. Having an “A”-type accessible account allows your “B & C” category of money, then can stay fully invested, so that your “B & C” type money, can accomplish their purposes.

I have clients who generally rebalance every year, by either (for example): 1) moving the annual growth from the “B”- category, into the” C”- category or) moving the annual growth, from the “C”-category money, into the “B”- category of money.
You have tremendous flexibility and control in working
these three categories of money together.

Keeping it simple, as we mentioned earlier, when a person is in pre-retirement, usually the focus is more on growth (accumulation of their nest egg), and as once someone hits retirement age status, usually they are more focused on income (distribution of their nest egg). Looking at the accumulation phase and distribution phase, George Foreman, the heavyweight fighter, had a very good saying, “it’s not at what asset amount one should be determining when to retire, but it’s at what income amount.”
Problem: Without proper planning, retirees can run out of money. If a retiree does NOT utilize “C” -category of money and just puts his entire $500k nest egg in the “at risk” stock market. And let’s say, was taking $50k of retirement income out every year, from the portfolio of stocks, to supplement his retirement income (we will discuss this more in the “I” Income chapter).
Here are two potential unfortunate outcomes:
1) every year the portfolio goes up & down, up & down and let’s say, basically, the stock portfolio remains flat (very little upward growth) over 20 years. taking $50k out every year for income, you are completely out of money in 20 years. You ran out of money; your surviving spouse ran out of money and no inheritance to the kids
2) You are a few years into retirement (with your $500k stock portfolio). The stock market (your portfolio) goes down 50%. Your $500k nest-egg is now $250k. Taking out $50k each year of income, you are now out of money in five years. You ran out of money; your surviving spouse ran out of money and there is no inheritance. All unnecessarily

Solution: Keep a balance of the three types of money and keep rebalancing, to remain in balance, in/with all three of the types of money (A, B & C types of money). Become Worry Free, utilize and money map, the three types of money. Remember “Principle Protected Programs/ PPP” also can provide lifetime guaranteed income.

For more information. Contact us, you will be glad you did.

ABC's All Together

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The advice and strategies in this book constitute the opinions of the author and may not be appropriate for your personal financial situation. You should, therefore, seek the advice and services of (your own personal) a competent financial professional, before utilizing any of the investment strategies, in this book. This book is copyrighted in November
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Retirement Income

This chapter is to educate and make efficient and effective, your income. Income and Inflation Planning

Problem : NOT having certain adequate incoming income, that will keep pace with inflation, will cause stress (especially in retirement )

Solution: put an income plan in place, to where you now know ,you will have adequate income, all the days of your life, this will bring Peace of Mind (If you are in retirement, only a guaranteed income program, can guarantee you income and that income, can keep pace with inflation).

When a person is in their earning years ,their ability to earn an “ earned income”, is their greatest asset .Although when a person retires ,then the money they've saved/their nest egg, is then supposed to provide/supplement or replace, with investment income, the income, they use to earn, before they retired, when they were still working.

Income is Important. USA Today, did a survey (through all age groups, geography and social economic classes), over 85% of the respondents, said for them to be happy, they need to know what income is coming through the door every month (this is now known as the happy index. You are happier, with a reliable income). So having reliable, adequate income, that’s above and beyond your expenses (positive cash flow) makes a person happier (of course, in chapter one, we mentioned, in addition to reliable income, to also have an emergency account/capital reserve, so this is, on top of, having reliable income. Having reliable income and “emergency account”, brings Peace of Mind. low stress).

Now in the last chapter, we talked about many health perils that could threaten your income and wealth. In summary, in the last chapter, we did recommend having many health-related types of insurance: health insurance, disability income, life insurance etc., but there are other perils, which could threaten your income and wealth (here are just a few).

We recommend, protecting yourself from Lawsuits, so to protect your income and family wealth. Such as, secure fire insurance on your home (if the fire starts at our home and spreads to the neighborhood, you will get sued, to replace the entire neighborhood. If someone gets injured in your home, you will get sued). Also, secure car insurance, to protect yourself from car lawsuits. Also secure an “umbrella” liability policy, this is a policy to provide excess limits of protection, above your car and fire/home insurance liability limits, to better protect you, from catastrophic lawsuits. I would also recommend, before entering into any contract, to do a “lawsuit
avoidance contract”, so that all disputes can be handled efficiently, economically and with minimum loss.
Protect yourself from Identity theft, secure an identity theft protection program, so that you do not get confused with someone else (an undesirable person), therefore threatening your income and wealth.

There are two phases of your life, in wealth .The “accumulation phase” of life ( this is the first half of life, where you are just accumulating/ building your up your nest egg) and then the “distribution phase” of life ( of where you are taking out distributions retirement income, from your nest egg, to live on). George Foreman, the heavyweight boxer, had a very interesting quote, he said "it's not the dollar value that you retire at, it's the
income" (we’ll talk more about that in chapter 12. here is one comment, which is in chapter 12. If a person has a $500k nest egg and it’s all in the stock market and they're taking $50k retirement income out each year to live on. If the stock market goes down 50%, so then the remaining nest egg is just $250k, then they still are taking $50k out each year in income to live on, then their nest egg, and the income from the nest egg, is gone after five years. Have an income plan, so to prevent running out of income).

When you are in retirement (the distribution phase of your life), income is key. income is the outcome of retirement. Let’s look at a few topics which might come up, regarding your employer’s retirement options.

A) once you sever employment, your employer may say, for your pension, you can have it lump sum (to take with you, for you to manage)or we can send you, a retirement check every month, as long as you live( or for a lesser amount, a payout for as long as you or your spouse shall live).If you take the monthly payout, then the monthly payout amount usually never goes up (it never grows), you give up all control/access
of the principle and once you die, all pension income stops( all bets are off. To add salt to the wound, and nothing goes on to your heirs). So, if you die soon, or you and your spouse die too soon, it’s a really bad deal. So, what should a person choose, to take a lump sum or a payout? Typically, a much better option than the employer payout option is to consider, secure a properly structured private pension plan/PPP. You could take the employers lump sum, secure a properly structured PPP, and with the PPP, you could still get a guaranteed income (for as long as you and your spouse are alive), still have control/access of the principle, still be enjoying future growth and still leave the “unpaid out” principle, to your heirs. So, with a properly structured PPP, you can get all the benefits of say your employers pension plan, but, as you can see, you can get so much more, by securing your own PPP.

But let's just say for a minute, you put a pencil and paper to it, and what if your employer really offered you an exceptionally high monthly payout amount? And then you had to decide, do I take the monthly income only over my lifetime or do I take the joint lifetime monthly payout, so it sends my household a monthly income, if either me or my spouse is alive. Still there are “in the open market”, planning techniques, which can still provide you much more monthly income to each spouse (still working with your employer options) and also, leave an inheritance, to our kids (where the employer plan leaves nothing, to our heirs). The private sector/open market, usually always, has better options to consider, that what on the surface, of your employers offer.

One other item to mention here is if you did take the employers monthly payout. If the employer got sued, what if the employer got in some tough economic times and what if the employer went bankrupt? That might also mean that your monthly payment, from your employer, would go bankrupt.

Social Security retirement income (SSRI). If both spouses worked (had gainful employment, for at least 10 full years. The years do not need to be consecutive earing years), then each spouse could get SSRI, based upon their own earning record. But let's say one spouse didn't work, say a wife was a homemaker, the homemaker can still get SSRI, based upon what the “working” spouse’s earning record was (so both, separately can still each get SSRI. Two SSRI checks coming into the retirement household). But when one spouse dies, then the surviving spouse gets to keep, only the higher of the two SSRI checks, but that is one less SSRI check coming into the household. Household expenses do not necessarily go down when one spouse dies, so this lost income needs to be planned for, with an income plan. Keeping it simple, but as you know, you can start taking/receiving SSRI, usually at age 62. The longer one waits, to start taking/receiving their SSRI, then by waiting, you do get a higher amount, whenever you do start taking SSRI. There's no reason to wait longer, past age 70, to start taking SSRI, because after age 70, the SSRI benefit no
longer increases. One reason a person may wait/defer taking their SSRI, until a later date, is that once a spouse dies, the surviving spouse, could then possibly, get a much greater death benefits/surviving spouse SSRI monthly check (if the deceased has waited longer, before starting to receive the SSRI).

Another reason, folks may defer/ wait until they start receiving /taking their SSRI, is that they may still choose to work for an earned income. Any earned income, up until the time the wage earner is age 66 (around age 66, this is referred to as full retirement age), that earned income, will reduce your SSRI amount (up unit age 66, earned income can penalize your SSRI amount. So, if folks are still working, many don’t start taking
SSRI, until after age 66).

Prepare an income plan, to fill the income gap. Let’s say you need $5k/month income, to cover your retirement living expenses. Let’s say your household SSRI is only $3k/ month. Therefore, you have at $2k / month “income gap”, that needs to be planned for. Do income planning.
That income gap could be filled with income from many sources:
A) Your employer pension (of either spouse’s),
B) from real estate rental property you own (problems can also arise here, of lack of good tenants, expensive maintenance etc.)
C) owning dividend paying stocks, preferred stocks or even bonds
D) by owning a business (of where you're retired but you are financing the business ,kind of a silent partner, but you're still getting the profits from the business)
E) with some of your nest egg, you could secure a properly structured, “Private Pension Plan/PPP” ,that will guarantee income coming in all the days of your and your bride’s life and can even go up/keeping pace with inflation.

The nest Egg/Golden Goose.
You build a nest-egg. One way to look at our nest- egg, is like “a golden goose”. What if you could preserve the goose and “live off the Eggs “(live off the eggs, the golden goose produces). Let’s say a person needed $50k/year retirement income, to live on, or to fill the income gap. Let’s say that person had a million-dollar nest-egg. If a person could get a 5% annual return off that nest-egg amount of 1million (5% if 1 million = $50k). That would be $50k /year income, never touching the principle. That’s high ROI, reliability of Income. In this example the $50k you're receiving every year covers all your income needs and you're never touching principles. this a worry-free retirement.

Inflation. Inflation is where money is buying less and less, due to inflation, eroding the purchasing power of your dollar. So, a dollar tomorrow might purchase a lot less, than what a dollar could buy today. What is an example of inflation? Well in 1990’s, a full college education cost $30k, today it cost $160k (see more about inflation in chapter 13 & 21). Keeping it simple, while you're in the accumulation phase of life, historically/over the long haul, stocks/the stock market (as a whole), has
produced real growth. Real growth is growth, above the inflation rate. But in retirement, putting your entire nest egg, in volatile stocks, may not be prudent (too much risk, of volatility of value, when you are in a time of your life, retirement, where you cannot afford to take too much risk/risk
in loose your nest egg, due to the stock market , going down). But, when you are much younger, in your accumulation phase of your life, to hedge yourself against inflation, you may want to consider investing some in the “natural resource” industry. The “natural resource” industry, has been known, to be called “hard assets”. There may or may not be, a direct correlation, but conceptually, as paper money/assets loses value, generally speaking (conceptually) “hard assets” can gain in value, so there maybe a little bit of diversification hedge, to potentially protect you from inflation. The author Benjamin Graham, mentioned, considering “natural resources”, as a potential hedge against inflation, but commented, that a portfolio, should not have more than 10% in natural resources.

Another comment about inflation/ losing purchasing power. If you are excessively heavy (high percentage of your nest egg, in stocks), and “letting it ride” and if the stock market, gets cut in half and they're still inflation, boy that’s what I call extra “salt in the wound”. At this point, you have lost twice (you are losing to inflation, and you are losing principle). Review chapter three.

A quick word about fees (more will follow in chapter 13). Let's say a person is in retirement and has a million-dollar nest egg, with combined brokerage fees of 2% (accounts can charge up to eight different, combined fees). 2% of a 1million= $20k each year in fees. If you can lower that and or avoid those fees, that would mean that $20k each year could be income to you, vs. income to the broker. That’s $1500/ month more income for you. Reducing taxes (in chapter 20), can also increase your income.
Much research suggests that folks with consistent/adequate /reliable income, live longer.
Do Income planning and protect your income, you will retire ten years earlier and live longer.

For more information, contact us, you will be glad you did.

Retirement Income

You Can Lose

This chapter is to educate, to make effective and efficient your “L” type of money. “L” is for you can Lose money.
Losses, Safety and Risk Management Planning.

Problem: your nest egg can lose loss of your principle and loss of your “growth”, can derail your, your spouse and your family's financial future.

Solution: Limit your losses, minimize going backwards. Assess risk. Have and implement your risk management game plan.
Losing money and “the risk of” losing money, is stressful. Stress can kill health, wealth and relationships. “Loss’, can I have many faces. Think about these losses.
1) Investing in stocks, stocks can go down in value.
2)you can also lose purchasing power, by your growth rate not being above the rate of inflation.
3)Fees. For example, if you broker is getting you an average rate of return of 7%, but he's charging me 2% fee, you are only netting 5% (so you actually could look at that fee, as coming off your growth, therefore a type of loss. I am losing 2%. On the presumption, I could minimize or eliminate those fees and still get the same service/efficient return).
4)Taxes. Same thing as above. If I am getting a 7% return, but I am in a 25% tax rate and getting taxed every year, I am netting only 5% (if I could, thorough tax planning, lower/minimize or eliminate the tax on the investment, I could avoid this loss, created by the excessive tax). Having tax costs, these costs, lessen my growth, so taxes could be looked upon as losses. What costs me in any, I lose the future value, of my costs.

There are many reasons for potential losses, we will discuss more of these reasons, more in chapter 18.

The bottom line is, losing money and or seeing your “nest egg” losing money (going backwards, or not advancing forward fast enough) can cause stress. As we've said earlier, stress is not a good thing. Stress can kill health, wealth and relationships. AARP did a survey in 2010, because they noticed a lot of their subscribers appeared to be going through divorces, so they did surveys. It was reported, a main reason for all the divorces of retirees, a major reason, was over finances. The financial stress could have connected to the fact, that in 2008, The stock market dropped approximately 50% (who knows, if retirees where over exposed, top heavy in their nest egg, being too much in stocks, maybe the man was more of a risk taker, than the wife was. Maybe the wife, wasn’t comfortable or aware of, taking all that risk, that then caused their retirement “nest egg” to be cut in half. Who knows, with a 50% loss in their nest egg, they may have had to tighten their belts or take a lot of fun activities off their bucket list. Or someone may have had to go back to work. Plus, the inheritance was affected. None of these are ideal).
I had a person come to my office, they told me a story, of their friends, a retired couple, who had invited them to go out to movies with them. They went to a Tuesday matinee. During the intermission of the movie, their friend went to the concession stand and only came back with one hot dog (not two, not one for him and one for his wife). They split the hot
dog. They could not afford two hot dogs. They also found out later, the reason their friends only had available time to go to the movies on Tuesdays, was because Tuesday, was half-price tickets. Better planning could have prevented this. This retiree couple had to tighten their belts.

Taking presumptions, with your nest-egg. A stockbroker may say, based on this assumed growth rate, you will not run out of money until age 85. Sounds so good, but what if you do NOT get that presumed growth rate? The broker is guessing. what if the market goes down, takes years to come back, you have not been getting that presumed growth rate (in those years, that the market was still down). If this happens, then you
run out of money sooner. What if you do get that growth rate, what if you live longer than age 85 (you are out of money). The broker is guessing, with your nest-egg.

When the stock market goes down, your broker might say, “well you know I lost money too” or “we all lost money” or It’s not a loss until you sell” or “it's only a paper loss... none of these comments are really reassuring, when it's your precious “nest egg”. For example, when the broker says, “I lost money too”, well hey he could be 30 years old he's not 60-year-old (like you). He has a much different time horizon to work with
than you. He can afford to take a lot more risk than you can. When your broker says, “it's not a loss until you sell”. You lost the opportunity cost. If your $500k portfolio loses 50%, you now lost $250k of purchasing power. The bottom line is, when there are significant downturns in your investments, you lose money, you lose time (which is the time value of money), you lose the future growth of the lost money, and you can lose
sleep.
One might say, well the stock market always comes back. Ok, let’s say it does, that does not mean your portfolio will come back. But the bigger question is, when will the stock market come back. In the years following, the year 2000, the NASDAQ stock market index, went down approximately 65%. It took approximately 15 years to come back. What if you were retired and taking money off that nest egg, to “live on” during those 15 years, then you don't even have the money (that same principle) in the account, to grow back with. With this scenario, a retiree, may have to go back to work. Could you imagine, after several years of retirement, having to go back to work (alarm clocks, traffic stress, deadline stress, learning new technology stress, making half of what you used to and working for a boss, half your age. Going back to work is less than ideal).
The bottom line here is that you lost 15 years of otherwise growth (as compared to, if you would have never suffered the loss). This is called opportunity cost / losses. What is opportunity cost? Let’s look at an example. Let's say that there is a bank CD's paying 5% (so you could get 5% without any stock market risk. You cannot lose principle with a bank cd etc.). For example, let’s say a person has a $500k nest egg, all in the stock market, the stock market drops 50%, now your nest egg is at $250k. For simplicity, let say, it takes 10 years to grow back to the $500k ( to go from $250k , back to $500k, a 100% re-growth, we will presume it takes ten years, for this 100% growth, to get back to where you where, this is just recovering what you lost, not Gaines. This is just getting back to where you were).

The $250k that was lost, if it never was lost, that $250k could have been getting 5% growth in the bank cd. Over those ten years, 5% on 250K, each year, over ten years, that = $125k. The opportunity cost of the stock markets loss, you lost $125 k of opportunity costs. Opportunity costs are losses.
Once again, the key question. What if you never suffered losses? How much better off would you be? One thing is for sure, you could retire earlier.

So, what might be part of the solution. For illustration purposes and just for the fun of it, let’s do a little comparison. Let’s compare an “at risk” account, to a principle protected program /PPP. As we saw in chapter 3, you do not have to take significant risks to get significant returns. This plays an even more vital role, when you're in the second half of life, because if you take losses in the second half of life, as we pointed out earlier, it can be devastating to a retiree, who cannot go back to work, or make up for that lost time. If say you are age 60, just getting ready to retire, and your nest egg gets cut in half (through stock market volatility), you may not have the energy to work another decade (for the stock market to come back). So generally speaking, as people get older, closer to retirement, they start to get more conservative, so to preserve that nest-egg, because if the nest-egg goes bye bye, so do your retirement dreams.

Back to the illiterate comparison. Chapter two discussed unprotected “at risk” assets. Chapter three discussed Principle protected programs/PPP. For simplicity, for illustration purposes, we are going to say these are the exact same asset. The column on the right, is the PPP/ the principle protected program (can never loose principle, due to stock market volatility, and the PPP “locks- in” applicable gains on an annual basis) and the other side, the column on the left is the unprotected account (the account goes up and down. No floor. No protection from losses). It’s the same asset. We are not counting fees or dividends, these could offset anyway, plus, for simplicity, I am using very extremely “round” numbers. You might be saying, if it the same asset, what’s the catch. With the PPP, the “catch is” for this protection from downturns(loss’s), you have to give up some of the upturn (Gaines).

In the first illustration, the right side, the protected side, we will have a 10% “cap” on the upturn side, where if there is growth, the most you could get/grow in any one year, is 10% (but of course, you can never lose money, due to stock market volatility).

Let’s start with a $500k nest egg, and let's say over a six-year time frame, the stock market goes up and down each year. Year one is up 10%, year two, is down 10%. Year three, is up 20%. Year four, is down 20%. Year five, is up 30%. Year six, is down 30%

Unprotected asset Protected/PPPapprox.
Value after yr. 1 $550k $550k
year two $500K $550k
year three $600k $600k
year four $500k $600k
year five $650k $650k
year six $500k $650k

At the end of these six years. If this was your money, which column would you rather have? The $500k or the $650k. In these six years, the left side went up and down (gave back Gaines) and did not even grow, plus made your blood pressure go up. the left side is still at its original $500k.
Now look at the right side. The principle protected program /PPP, was up over $650, earned $150k and did not cause you any high blood pressure.
Let’s go to another illustration. For simplicity, let’s say we had approximately the same concept as the above parameters, but instead of a 10% cap on the upside (of the PPP), let’s do a cap of 80% of the gain, in the PPP (and of course, with the PPP, still no downside risk/ no losses, from stock market volatility).

This example came up with the same conceptual results, as the previous illustration, here the PPP/ protected column, grew at about $250k, more, than the other column/ the unprotected column.
So, you can see, like when a stockbroker says, in a downturn market, “hey, we all lost money”, you can see, clients that own a PPP, never lose money, due to stock market volatility. Not all PPPs are created equal. All three financial industries offer their own type of PPP. A properly structured
portfolio of PPP’s can be very advantageous in retirement planning.

So, you can see, why take excessive risk with your “nest egg”, if you do not have to. “Safety first” (you do not have to lose, when you can assure, you win). For especially, someone in retirement status, the lower ‘stress “PPP, can play a wonderful enhancement to retirement.
Another potential positive aspect of the PPP’s, let say the market goes down. Well, if the market goes down, then at some point, it may go up (say in a rebound). With the PPP when their market goes down, you don't lose any principle, but then when the market goes back up, you may be able to capture (a portion of that gain), not from the previous year’s stock market low, but at the previous year's principal gain. So, with the PPP, when the market is going up and down, it’s possible you can actually leverage and benefit from volatility. Volatility can actually, work to your benefit, with a PPP. As with any program, there will be requirements and can have fees, ongoing fees and restrictions. We will talk more about this in chapters 13 and 18.

Some comments about minimizing losses.
General Patton, certainly the best general in World War Two, had a slogan “never go backwards”.
Scripture tells us, “I am your shield and exceeding great rear”. He is our shield, so what’s given to us is never lost.
Build your house on the rock (so it cannot sink, and you lose it).
Minimizing losses will preserve wealth and will let you retire much earlier.

You may be asking, how in the world can this financial institution make such an extravagant offer, of you can get “a good portion” of the stock Gaines, without any of the stock market losses.

For more information, contact us, you will be glad you did.

You Can Lose

Your IRA's & Qualified Money

This chapter is about your “Q” type of money. “Q” type of money, is for Qualified accounts and for Quality of life.
This chapter is to educate and make efficient and effective, your “Q” category of your money.

Problem: your qualified accounts are in partnership with the IRS; therefore, you are having a continually growing tax tumor.

Solution: when possible and appropriate, remodel your Qualified funds: your 401K ,403B, Traditional IRA’s, TSP, S.E.P. accounts.

What are qualified accounts? Qualified accounts (with qualified money funds in them) are pre-taxed accounts, that you have put “earned income” money into, without paying the income taxes on those funds, in the year, that you had earned the “earned income” in. Therefore, qualified funds (or funds in a qualified account), once dollars are put into these “qualified accounts”, these funds grow “tax- deferred”, until a later date, when you withdraw the funds. When you withdraw the funds, then the “withdrawn dollars” are taxed (as ordinary income), based on the tax bracket/tax rate, you are in, in the year, you withdraw the funds. So “qualified accounts”, is just a “wrapper”, of the account, that determines, how the account is to be
taxed. A “qualified account, is a tax-deferred account.

Qualified accounts (the funds in qualified accounts) usually also have other requirements, such as
1) in most cases, you're not able to take any funds out until the age of 59.5 (the owner reaching age 59.5). If you take withdrawals out prior to age 59.5, not only are income tax always going to be applicable, but there can also be a 10% IRS early withdrawal penalty.
2) Also, once the owner reaches the age 72.5, at this time, the federal government says, now every year you must start taking funds out (and paying income taxes on them). This requirement is called the RMD/ required minimum distribution. This RMD mandatory withdrawal percent increase every year. The penalty for not taking out the RMD is 50% of the RMD amount. Even if the owner dies, the beneficiaries still need to
pay the income tax on these funds.
A 401k plan is a typical employee type, of a “qualified account”. A typical benefit of say a “401K” plan, is that usually your employer can match some of the funds you put in.
(Interesting point here, ask the financial planner who gave you this book. Not counting the employer match, if tax bracket rate were the exact same amount, when retired vs when you were working, would there be any tax benefit).
Other than the employer match, the concept is, hopefully you will be in a lower tax bracket, when you will retire (than when you earned the money). But that may not always be the case. Historically, if you look at tax rates in the country, today we’re at some of the lowest tax rates. Also noteworthy, in retirement, a person can lose tax deductions, so you may not be in a lower tax rate, when you retire.
Also with the federal government record deficit spending, it’s very feasible that higher tax rates are inevitable.

Some limitations of Qualified funds.
1) they usually have limited options, like maybe only 20 mutual funds ,you can choose from
2) these mutual funds ,still have fees and the fees are paid by the owner (not the employer)
3) and especially looking at TSP (TSP is the 401k alternative , for federal government employees), a tremendously large amount of those limited TSP investment choices, have underperformed ( compared to “like” other alternatives)

On to a solutions. How can I remodel my 401k etc.? When the employer set up the “qualified program”, the employer set up a “plan document “. The “plan document, is what governs, how the 401k etc. will be administered. About 50% of all employer’s “plan document”, lets the employee (even when the employee, remains employed), with certain requirements, allows the employee take some of the funds out. The requirements, maybe something like, the employee must be at least age 50 or have at least five years of employment. Now if you're going to continue employment, with the employer, by no means, don’t discontinue the 401K plan (just transfer some of the principle out). Do not cancel the 401k plan, why, because you are going to continue to put money in there (so to get your employer match, on future funds you put into it). But you could take some of those funds out, even while you're still employed, transfer them into a Traditional IRA (for example), that would be going from a “qualified account, to another qualified account”, which can be a nontaxable event (transfer them in the appropriate way). Once the funds have been transferred into your traditional IRA, the IRAs are regulated by the federal government, not the plan document, so you have more flexibility. Plus, with an IRA, you have
1) much more investment options available to you
2) much more control of fees
3) much more tax control

When you actually retire, your employer may give you the choice, with your employer sponsored plan. The choice maybe, to take your funds in a lump sum or have “the employer”, to mail you a check every month (for as long as you or you and your spouse are alive). Which is the best option? Generically speaking, I would recommend considering, in most cases, taking funds with you, when you retire. If you were to keep these funds with your employer plan, here are some things to consider, thinking about. Remember Enron. Enron retirees, which had company stock, in their 401k plans etc., when Enron got investigated, all company stock was frozen etc. (not having total control of your money, is less than ideal). By having your qualified funds, into an IRA, you have so much more control of your funds (so take your funds, once you sever employment/once you retire). Genetically speaking, in most cases, it’s advisable to transfer your 401k funds into a traditional IRA, once they are available.

When you retire, your employer may also ask, “OK you've got this retirement plan, we will pay you an income, as you are alive (or for as long as you or your spouse are alive) or we can give you this fund, in a lump sum. Obviously, that is a big decision and should not be taken lightly. I think we've talked about this in previous chapters, but if you take the income and you and or you and your spouse die too soon ,then all bets are off and that can be a very bad decision ,because then your employer would keep that big principle (then you lose all growth from those funds, all access to those funds and nothing is left over to go to your heirs). Another option to consider is this, if you take the lump sum from your employer, transfer those same funds, into a properly structured, Private Pension Plan/PPP. Then not only could the PPP provide you and your spouse with lifetime income, but you would still have access to your unpaid out balance (principle and growth balance), could still go to your heirs. So, with a PPP, you could get so much more than what your employer was offering.

Also, in looking/making the decision, do I take the income stream, for only as long as I am alive, or for as long as I and my spouse are alive? There are many “open market” options, here, that you can put a pencil and paper to it, but you can usually come out some much more ahead (by researching your open market options), then just impulsively, making a split-second decision.
If you control your losses, taxes and fees, then you will be able to retire earlier Tax considerations, on your Qualified money. More will be discussed in chapter 20. With the record federal government deficit spending, taxes inevitably, someday need to go up. What if tax rates go to 50%? If you have $1 million in your IRA, it’s not all yours (only $500k is yours, only 50% is yours, because the other $500k is the IRS’s). This tax tumor actually increases, when the account value goes up.
Plan wisely, with your Qualified funds.

For more information, contact us, you will be glad you did.

Your IRA's & Qualified Money