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Phone (858) 455-1825 | Fax (858) 455-6211 | www.asset-preservation.com
January 2011
Volume 6, Issue 1
State of the Union Address
By
John L. Jenkins, AEP®, EA, CFP®
Another year has passed; the world’s
investment markets and economies
remain in turmoil with no immediate
end in sight. That means it’s time
for our annual State of the Union
Address.
Short term outlook: On the short
term we are bullish on the market.
There are several reasons for this
optimism. First, economies and markets are much worse in Europe than
in the U.S. As a result, money is
flowing from Europe into our stock
and bond markets providing “fuel” to
raise prices. We don’t see things
improving in Europe any time soon,
so this situation should persist for
some time. Second, the Federal Reserve has clearly indicated that they
intend to hold interest rates at current
levels for an extended period of time.
Third, the Federal Reserve has embarked on a Treasury Securities Buy
Back Program that will flood our
system with $600 Billion in cash.
Banks actually lose money when
they store cash in their vaults, so
guess what they will be forced to do
with it? That’s right – lend it out.
Fourth, corporate America has been
able to refinance their debt at very
low rates. In fact, corporate America
is much healthier today than it was
two years ago. It’s not that they are
growing earnings in a spectacular
fashion. Rather, their fiscal health is
due to significant cost cutting
(layoffs) and refinancing what debt
they carry at historically low interest
rates. Fifth, passage of the recent tax
legislation extending the Bush Tax
Cuts bodes well for our markets because it leaves more money in our
hands to spend and invest. Markets
like it when we cut taxes and dislike
it when we raise them. For all of
these reasons we see the next 6 to 9
months being positive with respect to
market returns.
Keep in mind that this is not a prediction. Things can change in an
instant and all bets can be off. This
is the most likely scenario that we
see unfolding in the absence of a major negative event like a terrorist attack on our soil or major natural disaster, etc.
Long term outlook:
We remain
cautiously pessimistic. At the core
of this pessimism are the current
state of housing in this country, interest rates and inflation, the lack of any
real jobs growth and the diminishing
and inadequate retirement accounts
of the baby boomer. The latter issue
is just beginning to appear in the media but will become a significant issue in the coming years in our opinion.
Housing: While the pace of foreclosures has abated somewhat since its
peak, they continue. We believe that
another one million foreclosures are
likely to occur in 2011 and that the
problem does not really begin to
abate until 2012. Why? Jobs, plain
and simple.
Jobs Growth: A total of approximately 8.5 million people have lost
their jobs since this crisis began. In
good times the U.S. economy adds
between 1 million and 1.5 million
jobs per year – and we’re not in
“good times”. Do the math. If
things were good it would take 5.3
years to add back the jobs we’ve lost.
How long will it take when things
are not good? In a recent 60 Minutes
Interview Ben Bernanke was quoted
as saying that we won’t see full employment for at least 5 years (http://
www.cbsnews.com/8301504803_162-2002463510391709.html . We think he’s right
on. I happen to personally believe
that some 2 million of these jobs
never come back – that in many respects we are being we are being
forced to reinvent “work”.
Americans will have to become
much more creative in terms of how
they earn a living. We see a long,
slow recovery given the depth and
breadth of this recession.
Interest Rates and Inflation: While
the Federal Reserve has tried to artificially keep interest rates at historical lows, we have already seen the
effects of market forces pushing
long-term rates up almost a full 1%
over the last quarter. We don’t believe rates will change much until
later in 2011 at the earliest. Eventually we do see inflation and forces
related to a weaker U.S. Dollar pushing interest rates up.
Inadequate Retirement Savings:
Again, in another 60 Minutes Story
titled “99 Weeks: When Unemployment Benefits Run Out” which ran
on October 24, 2010 (http://
www.cbsnews.com/
stories/2010/10/21/60minutes/
main6978943.shtml), they highlighted the plight of 100 former Silicon Valley employees whose unemployment benefits had run out.
These are but a few of the ~1.5 million Americans for whom unemployment benefits have expired, despite
the recent legislation to extend these
benefits. It turns out that you have to
be receiving unemployment benefits
in order to be eligible for an extension. If they have already expired,
you’re toast.
Take a look at this story and like me
you will be appalled at the statistics
in the room. These are highly educated, formerly very well compensated professionals who cannot find a
job in their areas of expertise, education or training. Worst of all, two
thirds of these people have exhausted
their retirement savings making payments on their homes and putting
food on the table. On the precipice
of retirement they find themselves
starting over from scratch, with no
job, expensive COBRA health insurance if they can afford it at all, and
little to no retirement savings. Imagine yourself in that position and ask
yourself: What do I do now? This
situation continues to spread among
the millions of Americans who have
lost their jobs with no immediate end
in sight.
In my opinion what is now going on
globally is a very significant economic paradigm shift during which
work, retirement, business ethics and
consumerism will be redefined. I
believe that for many baby boomers
the dream of a self-sufficient retirement is now beyond reach. I see
baby boomers working much longer
than they originally planned, retiring
later if at all, downsizing their lifestyles and homes and starting another
trend of multiple generations living
together under one roof simply for
the reason that none of them can afford a nice home and all that goes
with it on their significantly reduced
retirement income.
This is not necessarily all bad. In
fact, I can foresee a lot of good coming out of this paradigm shift. For
example, less focus on material accumulation, less striving to “make it to
the top”, less stress as a result, more
family time, a return to fundamental
values, increased friendships and
ethics in all endeavors, more time
pursuing hobbies, personal interests,
charitable activities and health rather
than spinning our wheels on the
treadmill of success. For me, this
means spending less time working,
although like many baby boomers I
have no plans for imminent retirement, playing more guitar, taking
more bike rides, traveling, spending
more time with my wife, kids and
friends. The trick will be to balance
our financial needs and the plans and
tasks required to be responsible let
alone successful in this regard with
our personal and familial needs.
In summary, it boils down to balance
and hasn’t that always been the bogie? I do believe that priorities are
changing and significantly so. Are
yours? Let us know how we can
help, whether it’s assuring a retirement income strategy or redefining
your financial goals.
The opinions and forecasts expressed
are those of the author, and may not
actually come to pass. This information is subject to change at any time,
based on market and other conditions and should not be construed as
investment advice or a recommendation of any specific security. Investing involves risk, including loss of
principal. An investor’s shares,
when redeemed, may be worth more
or less than the original investment
amount. Past performance does not
guarantee future results.”
Business Value
Drivers: Systemize
Internal Operations
By Gregory R. Banner
In the past we discussed how owners
can build the business value necessary to achieve the post-business exit
lifestyles they desire.
Today, we will discuss: Systemizing
Internal Operations. A common denominator of Best of the Best companies is that they perform tasks in the
same way—every time. They systemize each and every internal operation. Because owners correctly assume that there are many areas that
can be classified as internal operations, they can be so overwhelmed
by the sheer number of areas to address that they fail to address any.
For that reason, we limit our discussion of internal operations to just a
few items:
• Create a system to collect and
use customer feedback
• Diversify vendor and supplier
relationships
If you wonder whether installing systems in these (and all) areas of your
company is worth your time or effort, let’s look at systems from the
perspective of a future buyer. If a
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Create a System to Diversify Vendor Dec. 30 though it would continue to
and Supplier Relationships.
service its 600,000 insured customers.
The reason? “Financial challenges” in
Can you name the vendors or suppliers the long-term care insurance industry.
who are essential to your ability to provide your most important products or What does that mean?
services? If one (or more) of your primary vendors or suppliers switches its In short, that long-term care costs have
relationship from you to a competitor, proven unpredictable in the insurance
goes out of business, changes its pay- industry, a world that definitely likes
ment requirements, changes its quality predictability. According to Genworth
standards or stops offering the prodFinancial, a marketer of LTC insuructs
or
services
that
you
need,
would
ance, the cost of assisted living has
Your Competitor’s Company which
your
company
experience
a
short-term
climbed at an annual rate of 6.7 perrelies on systems that:
or long-term negative impact? If so, do cent over the past five years and the
• Are written and communicated
you have a plan to handle that impact? price for a private room in a nursing
clearly;
You can stabilize your business and
home jumped 4.5 percent annually
• Are adhered to by all employees; build business value by reducing the
over that timeframe. Insurers have
• Produce consistent results; and
risk associated with unpredictable ven- been increasing LTC premiums to
• Will be in place long after the
dors and suppliers.
combat this cost rise, making recesowner leaves.
If we can answer any questions you
sion-battered 2009 one of the worst
may have about the many ways you
years for policy sales.
As you can see, systemizing internal
can systemize your company’s internal
operations is a critical Value Driver.
operations to increase company value, It’s unclear whether other major carriAs an owner, creating systems that
please give us a call.
ers might join MetLife, but their deciwork for your company should be the Subsequent issues of The Exit Plansion adds some uncertainty to the picheart of what you do every day. If you ning Review™ discuss all aspects of
ture for long-term care planning, one
don’t do this well, your company will Exit Planning.
of the most important ways to protect
not be as successful as it can be, and
retirement funds.
you will work much harder and longer Gregory Banner of Asset Preservation
than needed.
For some needed perspective, it makes
Strategies offers you unbiased inforsense to visit a qualified financial planmation about what you may need to
Let’s look at two areas where you
know — How To Run Your Business So ning expert who can look at your commight begin to create some internal
plete financial picture and make a recYou Can Leave It In Style™.
systems.
ommendation.
buyer compares your company to another, which company will he or she
pay more for?
Your Company which is run by an
owner who:
• Has creatively and effectively built
the business with intuition and intelligence; and
• Will be gone once the buyer takes
the reins.
Or
Create a System to Collect and Use
Customer Feedback. How are customer complaints addressed in your
company? Is there a well-thought out
procedure for doing so or are they addressed on a case-by-case basis in a
manner that cannot easily be described? If your company uses customer feedback effectively, it can create a competitive advantage for you
compared to your competitors. If not,
your company may be pulled in too
many directions and cause you and
your entire team to lose focus. Strategic use of customers and their ideas,
suggestions, requests and expectations
creates strength, stability and inherent
value in your business.
Client Review Appts.
Please expect to hear from our office
about scheduling your next regular
client review appointment.
With Premiums Increasing and a Major Carrier Exiting
the Market, Should
You Still Consider
LTC Insurance?
On Nov. 11, insurance giant MetLife
said it would sell no new long-term
care (LTC) insurance policies after
Here are some of the questions you
need to answer before investing in
long-term care insurance or other options:
What resources do you have? We’re
not just talking about money here.
While caregiving puts a strain on family, it’s important to consider whether
family and friends are truly willing and
able to help with your care, which can
provide a considerable financial and
emotional benefit. Also, if you live in
a community with reliable volunteer
resources to help, that’s something to
note, though today’s services may not
be there tomorrow.
(Continued on page 4)
3
that person needs substantial supervision related to cognitive impairment.
How old are you and your spouse
and what’s your health history?
People in good health purchasing
long-term care insurance at the age
of 55 usually get the most affordable
deal in LTC insurance. But an individual’s family health history and
current health status are the real determinants of what your LTC insurance policy will cost – or if you’ll
qualify for coverage at all. Also, it’s
important to note that 40 percent of
long-term care is provided to individuals between the ages of 19 and
65, so the need for care can strike at
any time.
This is where you have to read the
fine print since some policies are
more restrictive than others. More
affordable policies generally take
longer to kick in. See if coverage for
other physical ailments is available
as part of the policy and what perdiem or monthly allowances are offered.
How healthy is the insurance company? While it’s impossible to tell
the future – or when a major carrier
wants out of a particular line of business – it’s generally better to go with
a larger, higher-rated company.
Are you a single female? Again,
personal and family resources come
into play here, but since women typically live longer than men – and they
still earn less on average than men –
women should take a heightened interest in providing for their long-term
care safety net. Long-term care insurance might be a good solution
given their other investments and
their health history.
What types of services are covered? Over the course of time, longterm care policies have evolved to
place more emphasis on home-based
care or assisted living, since most
people would choose to recover or
live out their last days in a familiar
environment. A basic LTC insurance
policy pays for assistance with activities of daily living including eating,
dressing, bathing, toileting, incontinence, and transferring (bed to chair,
etc.). Each policy lists the types of
services that are covered under nursing home care and under home health
care. Homemaker services are generally covered and other services as
listed in the policy.
How affordable will the policy be if
your premium increases? If you
can barely afford LTC coverage now,
it’s going to be much tougher to afford premiums if they go up over
time. Talk with a planner about other
options if that’s the case.
What about an annuity? There are
hybrid annuities that also carry longterm care coverage. These products
allow policyholders to use the proceeds for LTC coverage, for income
or for both.
The proceeds that go to pay for longterm care costs for the policyholder
would not be subject to federal tax.
These long-term care annuities can
generate tax-deferred gains, which
works particularly well for those in
high tax brackets who believe they
will be in a lower bracket by the time
they would need to draw on that coverage.
What triggers coverage? A qualified LTC policy won’t go into effect
until the covered individual can’t
perform two tasks of daily living for
a period, typically 90 days, or when
December 2010 — This column is produced by the Financial Planning Association, the membership organization for
the financial planning community, and is
provided by John L. Jenkins, AEP®, EA,
CFP®, a local member of FPA.
Workshops
We will forward workshop notices
and dates by email.
Reviewing Annuity
Basics
Recent research from the Financial
Planning Association® (FPA®) shows
that planners are embracing annuity
products to help a more conservative
generation of clients protect assets
and reach their retirement goals. Apparently the White House is getting
in on the annuity bandwagon as well.
The question is, should you? First,
start with the definition. An annuity
is a financial product that accepts
funds from an individual with a plan
to grow them, and then at a specific
time begins a stream of regular payments to guarantee a steady flow of
inflation-protected cash to that individual until they die. Annuities come
with various features, which will be
detailed below.
The whole notion of guaranteed payments after an economic crisis seems
to be more attractive these days.
A report in the April FPA Journal of
Financial Planning stated that 35
Isn't it interesting that the same people who laugh at science fiction listen
to weather forecasts and economists?
- Kelvin Throop III
4
percent of advisers surveyed said the
recent financial crisis had changed
the way they viewed annuities and as
a result, they were more likely to use
or recommend them than they were
before the crisis. Washington also
appears to be getting friendly with
annuities as a conservative solution
for those in retirement. In January,
the Obama Administration released a
report from its Middle Class Task
Force favoring annuities as one of a
series of tools that might offer guaranteed life income to millions of
Americans.
Annuities have plenty of promoters
and detractors, and it’s best to start
by reading as much about them as
possible first, and then discussing
your retirement savings choices with
your tax professional and an experienced financial adviser. Some basics:
Annuities come in two flavors –
fixed and variable: Fixed annuities
offer a return that are tied to interest
rates or a particular index, meaning
these are “fixed” investments your
money will always be tied to. Variable annuities are invested in a series
of investments -- referred to as investment sub-accounts -- that allow
the investor to change their investment allocations. If you are willing
to pay heftier fees, you may be able
to receive a guarantee that your variable annuity will not dip below the
value of the initial principal.
Tax-deferred growth, but payments are taxed as ordinary income: Just like a 401(k) or IRA, the
contributions and earnings within an
annuity grow tax-deferred until the
funds start coming out. But also like
a 401(k) or IRA, you pay a 10 percent penalty for early withdrawals if
you are younger than age 59 ½. Yet
there’s a tradeoff for a lifetime guaranteed payment, and that’s the taxman. All withdrawals are treated as
ordinary income and don’t qualify
for more favorable long-term capital
gains treatment.
Money for life, but check the company thoroughly: The number one
selling point of any annuity is that
the issuer – typically an insurance
company that writes up an annuity
contract – guarantees that you will
receive money for as long as you
live. Of course, you need to make
sure the insurance company behind
the annuity contract is financially
healthy. Check its Comdex ranking,
which is an average percentile ranking of credit ratings provided for life
health insurance companies by firms
such as Moody’s Investors Service,
A.M. Best Company and Standard &
Poor’s Corporation.
Fees and commissions can be
steep: Always ask how much commission an agent makes – and planners can be agents if they are properly licensed – when they sell you an
annuity. And be sure to compare
commissions and ongoing fees on
any annuity products you consider.
Also keep in mind
that some annuities can charge a surrender fee if you withdraw your
money before age 59 ½ in addition to
the 10 percent penalty.
Compare promised returns: We’re
still in a low interest-rate environment. Understand how any annuity
you’re considering will react in various interest rate scenarios.
Check out consequences of transferring an annuity: Find out what
the tax and economic ramifications
might be for transferring an annuity
to spouses or other family members
when you die. This effort should be
part of an overall review of your personal finances and the creation of
an estate plan.
Stay diversified: Keep in mind that
putting everything you have into an
annuity is not good financial planning. Discuss how you should allocate all your assets as you head into
your retirement years.
May 2010 — This column is produced by the
Financial Planning Association, the membership organization for the financial planning
community, and is provided by John L. Jenkins, AEP®, EA, CFP®, a local member of
FPA.
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to
income tax and, if taken prior to age 59½,
a 10% federal tax penalty may apply.
Early withdrawals may be subject to withdrawal charges. Optional riders are
available at an additional cost. All guarantees are based on the claims paying
ability of the insurer. An annuity is a taxdeferred investment. Holding an annuity
in an IRA or other qualified account offers no additional tax benefit. Therefore,
an annuity should be used to fund an IRA
or qualified plan for annuity features
other than tax deferral. Product features
and availability vary by state. Restrictions
and limitations may apply.
Investors should carefully consider a variable annuity’s risks, charges, limitations,
and expenses, as well as the risks,
charges, expenses, and investment objectives of the underlying investment options.
This and other information is provided in
the product and underlying fund prospectuses. Please contact the annuity company or your advisor to obtain a copy of
these prospectuses. Read them carefully
before investing.
An insurer's financial strength rating
represents an opinion by the issuing
agency regarding the ability of an insurance company to meet its financial obligations to its policyholders and contract
holders. A rating is an opinion of the rating agency only, and not a statement of
fact or recommendation to purchase, sell
or hold any security, policy or contract.
These ratings do not imply approval of
products and do not reflect any indication
of their performance. For more information about a particular rating or rating
agency, please visit the Web site of the
relevant agency.
5
Take Note
Referrals
Thank you for your
Referrals
SAVE THE DATE!
FRIDAY, APR. 15th
8-10 PM
Most of our new clients come as a
result of referrals from people like
you. If you know a friend, family
member or small business owner
who might benefit from our services, please let us know. Be assured that anyone you refer to our
firm will be treated with the same
high standards of professionalism
and confidentiality that we extend
to you and all of our clients.
John will perform as part of the
Encinitas Guitar Orchestra under
the direction of Peter Pupping,
www.encinitasguitarorchestra.com.
The theme for this performance is
The Beatles!
The concert will take place at
Bethlehem Lutheran Church, 925
Balour Dr, Encinitas, CA.
Extended! The exclusion for
transfer of funds from an IRA directly to charity expired for transfers made after Dec. 31, 2009.
However, the 2010 Tax Relief
Act extended the provision for
two years through 2011.
The provision contains a special
rule permitting taxpayers to elect
to have a qualified charitable distribution made in the month of
January 2001 treated as if made
on December 31, 2010.
Securities offered through Securities America, Inc., member FINRA, SIPC, John Jenkins, CA
Insurance License #0647708 and Gregory Banner, CA Insurance License #0B64761, Registered Representatives. Advisory and tax services offered through Asset Preservation Strategies, Inc., a SEC Registered Investment Advisor. Asset Preservation Strategies, Inc. , and the
Securities America Companies are separate, unaffiliated entities.
royal and Royal Society president
Martin Rees questioned whether
we are smart enough to use what
we’ve learned to save ourselves.
3636 Nobel Drive, Suite 440
San Diego, CA 92122-1042
If this doesn’t get your attention
and cause you to change anything,
then perhaps they are right.
Human Extinction?
Two eminent scientists said the human race is likely to become extinct at its own hand within the
next 100 years (One Hundred - not
Ten Thousand, not One Hundred
Thousand!) as it exhausts resources
through a population explosion and
unbridled consumption. “It’s an
irreversible situation. I think it’s
too late,” said recently deceased
Australian microbiologist Frank
Fenner, who helped eradicate
smallpox. Britain’s astronomer-
6
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