Monday, August 23, 2010

The Case AGAINST “Don’t Put All Your Eggs in One Basket”

The Case AGAINST “Don’t Put All Your Eggs in One Basket”

I am sure you’d agree with me that perhaps the most widely used phrase in the field of personal finance is: Don’t put all your eggs in one basket.

But if you really think about it, does this always make sense? For instance, if your financial advisor claimed that he/she knew which portfolio would effectively accomplish your financial goals, why wouldn’t you go in for the kill? Why would any sane person want only a little bit of something that was assured to work really, really well?

Or … could it be that most traditional financial advisors know perfectly well that these so-called diversified portfolios they propose are pure gambles: both unpredictable and with the potential to actually vanish at a moment’s notice? So in reality, aren’t they just prudently covering their own butts by encouraging investors – that’s YOU – not to put all their eggs in such unpredictable baskets?

About a year ago, I had the opportunity to make a recommendation to a then-63-year-old lady who wanted to ensure that the $200,000 she intended to leave for her only son and two grandchildren reached them intact. At the time I met with her, I was unaware that she had already consulted with two other financial professionals, both of whom recommended dividing up the said amount among various bond, money market, and “conservative, diversified” mutual funds. You know, so she didn’t put all her eggs in one basket.

Here’s What I Recommended

I advised her to use the $200,000 to purchase a contract that would pay her $11,880 annually beginning immediately and lasting as long as she lives – regardless of what happens with the stock market. Then I suggested she purchase a permanent life insurance policy with a No-Lapse Guarantee, through age 110 – should she be fortunate enough to live that long – in the amount of $400,000. The guaranteed level premium for such a policy is $5,598 per year.

So here’s a simple breakdown of what’s going on: She’ll be receiving $11,880 which after an estimated 25 percent tax (or $2,970) would net $8,910. This amount will keep flowing for as long as she lives, period! And if it so happens that she dies before drawing the entire $200,000, her beneficiaries (son and grandchildren) will receive a check for the remainder. But the payments will not stop after she draws all $200,000. If you do the math, the initial $200,000 investment will be depleted in about 17 years (or around age 80), but those payments will keep coming for as long as she lives. Isn’t this just beautiful – and the very definition of peace of mind?

Then out of that net amount of $8,910, she will pay the $5,598 premiums to guarantee that her beneficiaries receive a death benefit check for $400,000. And you know what takes this over the top? Under section 101 of the Internal Revenue Code, that $400,000 check is completely income-tax free! No kidding!

You are quite the smart cookie, so you realize that the woman still has $3,312 left (the difference between the $8,910 yearly draw and the $5,598 insurance premium) to do with whatever she likes. I recommended using it to enjoy a really nice, quality vacation each year with the people who matter most to her – the very ones for whom she is protecting the $200,000.

So let’s say this lady lives for 20 more years, just to age 83. She will have received $11,880 for 20 years, which amounts to $237,600. This is a guaranteed contract, so there is no stock-market hoopla to lose any sleep over. And – in addition – her family will still receive a $400,000 income-tax free check, upon her death.

Are you getting the BEST financial advice?

I have no idea about your situation, but can you even begin to comprehend how this seemingly simple yet thoughtful and powerful strategy changed this lady’s outlook on life? Of course, she decided to dump the “don’t put all your eggs in one basket” approach to go with common-sense and precisely put everything into the one basket that is guaranteed to work.

This might really be something to laugh about. Try telling your spouse/partner that it really ISN'T a good idea to put all your eggs in one basket, and watch their reaction. Just don’t tell them that I suggested you say that.
Contact Laser Financial Group today - or phone us at 301.949.4449  to schedule your free consultation so that we can review your financial goals and retirement plans. Of course you're always free to follow traditional financial advice, but you might rethink that once you learn a proven, common-sense approach!

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