Monday, April 26, 2010

How to Rescue Your IRA with a Guarantee or Two

How to Rescue Your IRA with a Guarantee or Two

Today I share with you the story of a client who recently contacted us was able to guarantee and double her children’s inheritance. Notice the keywords here: guarantee and double.

Between the checks from two pensions, Social Security, and IRAs, 69-year-young widow, JB, has enough income to continue living comfortably. However, after losing nearly 20 percent of her IRA’s value during the 2008 stock market meltdown, JB decided to set aside $300,000 for her two children. “After what happened with the stock market, I want to guarantee that my children receive at least this $300,000.”

JB’s long-time, big-company financial advisor proposed that she transfer $300,000 into a jumbo money market fund, which presently pays a yearly interest rate of 1.05 percent or $3,150. In all fairness, this proposal is an option that will meet JB’s goal. In fact, you’ve likely heard many “expert advisors” offering similar advice in the media. But the zillion-dollar question remains: Is this the best means of achieving JB’s goal? And just so we’re clear, the term jumbo means that the money market is really, R-E-A-L-L-Y huge and pays great interest.

Following a suggestion by one of her friends, JB consulted with me for a second opinion. JB didn’t tell me much, except that she has $300,000 she intends to leave for her children, and going forward she does “NOT want to lose even a dollar when the stock market crashes.”

I suggested we invest her $300,000 in an IRA contract with one of the A-rated carriers we recommend. This IRA comes with the guarantee that the $300,000 will never decrease due to market risk. In addition, she will earn a guaranteed minimum 3 percent annual interest. And if the S&P 500 Index, as defined by the contract, returns more than 3 percent in any given year, her IRA will be credited the growth up to a maximum of 6.5 percent.

So in plain language, the $300,000 is guaranteed to earn at least $9,000, and could earn up to $19,500 in interest per year, going forward. This is all covered in a written contract she receives from an A-rated company. This is not a joke; it’s a common-sense, proven, and practical approach to meeting JB’s goal.

Wait, That is Just One Part of My Proposal

For the second part, I proposed that JB purchase a permanent life insurance contract – one that will guarantee the death benefit for as long as she lives – with the guaranteed interest from the IRA. Based on my extremely conservative estimate, each year she’ll net about $6,300 (or $9,000, less 30% tax, because the $300,000 is qualified money).

We were able to get her approved with a standard rating by a top-rated carrier for a total death benefit of $230,000, for a premium of $4,923 per year. Remember, she’s 69 years young.

Under both her long-time advisor’s proposal and mine, this $300,000 will transfer after tax (based on her children’s tax brackets, which we estimate to be about 30 percent). They’ll therefore end up with a net of $210,000, after paying $90,000 in income-taxes.


Where I turbocharged JB’s dollars was in informing her of another – in my opinion, even more powerful – guarantee that an extra $230,000 from the insurance contact will go to her children, A-B-S-O-L-U-T-E-L-Y income-tax free!

Recall that saying about the difference between night and day? Here’s a simple way to illustrate such an extreme. For the exact same $300,000 outlay, JB’s so-called advisors’ proposal will net her $210,000 ($105,000 per child) versus my plan, which will net $440,000 ($220,000 for each child) and still include all the guarantees she wanted.

I must point out that JB’s “worst-case scenario” net annual guaranteed minimum interest from my plan is $6,300, while the insurance premium is $4,923, leaving an extra $1,377 which I doubt anyone will complain about. Also notice that this interest could be as high as $19,500; however, for the sake of prudent planning, I based the plan around the lowest figure.

Of course this is a no-brainer, so JB was ecstatic and has since set her plan in motion. The most important question for you to ponder is whether you will heed your friend’s advice and seek a second opinion, especially when you’ve been with your big-company advisor for so long.

In conclusion, let me say that there is good, there is better, and then there is best. Which do you believe your hard-earned wealth deserves? Note, the above was the recommended plan for JB; yours will be tailored to your situation and will likely have a different net result.

Please contact us for your free consultation at (301) 949-4449 or to learn what kind of plan we can develop to meet YOUR needs and goals.

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