PFP Group is a licensed annuity broker within the state of Michigan providing a wide range of annuity investment options to its insurance and investment clients. First it is important to understand the concept of annuities and the differences between types of annuity contracts.

Annuities simply are investment contracts with insurance companies of which premiums paid are invested for a number of years (term) to provide a stream of income to the annuitant beginning at some point in time. The point in time may be before the annuity contract term expires, or upon the expiration date. In even simpler terms, annuities are a contracted savings and investment vehicle for the annuity holders.

There are two primary types of annuities, fixed and variable.

A fixed annuity provides a guaranteed rate of interest during the accumulation period and a guaranteed (“fixed”) amount of income when the contract is annuitized. With a fixed annuity, the insurance company is responsible for investing the premium payments and therefore assumes investment risk. The insurance company is obligated to provide guaranteed annuity payments regardless of whether their investments have generated an adequate rate of return.

In contrast to a fixed annuity, the key features of a variable annuity can fluctuate (they are “variable”) during the accumulation period and during the payout phase. Also in contrast to a fixed annuity, the variable annuity contract holder assumes much of the investment risk. With a variable annuity, the insurance company provides the contract holder with the ability to determine how his or her premiums are invested. One investment option is a variable account which typically consists of equity, bond or money market mutual funds. The other option is the general account of a variable annuity which provides a guaranteed return. The contract holder decides how much risk or variability they want to tolerate by allocating premium payments among the general and variable accounts. The amount of money accumulated and the amount of income during the payout phase are determined by the returns of these accounts.

Each type of annuity has its advantages and disadvantages from a risk and or reward perspective. PFP Group advisors can provided detailed financial planning analysis of each clients current and expected financial situations and can make recommendations of which type of annuity contract if any at all make sense for achieving the clients objective.

One of the most archaic yet still widely used sales tactics for individuals heading into or already in retirement is the concept of the fixed income plan.   The plan is sold by a commissioned based stock broker (aka financial advisor these days) and is sold at high commission levels.   Here is how the plan works.

A retired investor (like you) is thinking of how to best protect your remaining investments that for some reason you are holding outside of an annuity or IRA account.   Without much knowledge, you contact your stock broker (aka financial advisor) who is more than happy to sell you some bonds.   Bonds, other than US Treasuries or Muni bonds, operate in a world of smoke and haze for most investors.   Your stockbroker’s company owns a large inventory of bonds that it bought in bulk at a discount some time ago.   They mark up the price, sometimes 5-15% more than what the bond is really worth…and then sell it to you guaranteed to pay you out regular payments at a fixed interest rate.

Here are the issues that we have with this “plan”.  One, you should be drawing retirement income either from an annuity or IRA.  You should not under any circumstances be walking in off the street and buying bonds from anyone and holding them in a taxable account with your broker.   The only exception here may be with US Treasuries or Municipal bonds, but most certainly not with any other kind of bond.   There is a simple reason for this…you are taxed on the interest income which in most cases is fairly low as it is because bond return rates usually run in the 2-5% range.   This taxation is eating away at your “income” from your bonds.

The second issue is that you are paying an outrageous commission to your stock broker (aka financial advisor) for doing nothing.   Your stockbroker does not know or care what the tax implications may be, or how the bonds will compliment the rest of your investment portfolio.   For example, you could be sold corporate bonds of long maturity which have the same risk as holding stock in that same company.  You are simply being sold excess inventory at a premium price.

Third, the smoke and haze portion of bond pricing.   With the exception of US Treasuries and Municipal bonds which now have fairly open information about recent sales and direct buy programs, there are no hard set prices for most bonds sold to individual investors (like you) on the secondary market (through your stock broker).   It is to be noted that for the most part, you will see generally the lowest yields from US Treasuries compared to yields advertised in the 5%+  range.  These “high yield” bonds are for very risky bond issues from corporate sources or going bankrupt states like California selling municipal bonds to fund ill-planned and timed infrastructure projects.

And finally, we do not like putting our clients in a vulnerable situation subject to volatile interest rates and the possibility of inflation.   At the time when our clients need the most stability while still maintaining growth, it is difficult to hedge against changes in interest rates or inflation possibilities with anything other than TIP’s  or very short term US Treasuries.   Again this issue here with short term bonds is that the yields will be low, and if not traded in a tax deferred account such as an IRA or variable annuity, you run the risk of significant and immediate tax implications on the interest income.   This tax burden against the low yields of these short term bonds will nearly wipe out most appreciable gain..i.e. the “fixed income”.

In summary, to rely upon a tactic like fixed income investing for retirement will in most cases cost you more than the investments are worth due to high commissions and unclear pricing, and will stick you with a taxable event (exceptions for US Treasuries and Municipal bonds), for investments that are as risky or carry more risk than other investments.

We like bonds as part of a balanced and diversified portfolio, but we rarely if ever recommend this strategy for retired investors seeking safe investments and steady interest payments.   That just does not exist in fixed income investing.

A hot topic this year with clients is the discussion of whether or not to take advantage of the 2010-2011 Roth conversion option.   From our perspective, in comparison to most in the industry, it may not be such a great idea.

You hear much about the conversion process and benefits, and many who promote the conversion tend to have some amount of financial benefit for performing the conversion for you.   As the client, you pay the tax bill and move on.   But is it such a great idea?

From our perspective we aren’t as comfortable in the idea for the majority of our clients.   First, we believe this is more of a gimmick to generate tax revenue in a sluggish economy by tempting presumably working (and higher tax bracket individuals) to convert their traditional IRA’s to Roth accounts.   If you think about it, why is there sudden apparent “good will” from the IRS towards taxpayers?   Why would the IRS be so inclined to offer this benefit if there wasn’t some motive behind it?

We believe that because most individuals who have substantial IRA accounts are 1) employed and 2) likely in a higher tax bracket, which 3) would push them into the highest tax bracket when the conversion is taken.   And remember, its not just the conversion funds that are now taxed at the higher (or highest) ordinary income tax bracket, it’s all of the regular income (wages) that are subject to taxation at that now higher tax bracket for the year.

We feel that its best to keep your traditional IRA’s in place and continue to invest tax deferred.   There is great certainty that when you do begin to take distributions from your IRA you will be 1) retired, 2) in the lowest tax bracket and 3) not likely to push yourself into a higher tax bracket when distributions are taken.   Moreover, we have no idea what the tax system may look like at the time of your retirement but there is a good chance it might look very different (even positive) from today’s existing tax structure.  At the very least at the time of retirement you should be in the lowest tax bracket, trickling out distributions (compared to a large lump sum today at the highest taxable bracket) and continuing to compound tax free within your IRA.

Solo 401k IRA’s are an excellent wealth preservation and retirement tool for individuals who are looking for greater retirement contributions and savings compared to traditional IRA, 401k or Roth accounts.

January 2010 – The department of Labor included in its most recent agenda an initiative by it’s Employee Benefits Security Administration (EBSA) to promote annuities for all workers as part of 401k’s and other retirement benefit plans.  “EBSA will also explore steps it can take by regulation, or otherwise, to encourage the offering of lifetime annuities or similar lifetime benefits distribution options for participants and beneficiaries of defined contribution plans” the agenda document read.

During the economic downturn of 2008-2009, Annuities were one of the few investment products that remained steady in value, compared to similar holdings in taxable mutual fund investments. Annuitization of pension and retirement funds have been a hot topic amongst congressional leaders during 2009, and a few say it could be the precursor to winding down the Social Security system.

Time will tell what Washington has to say with regards to actual legislation passed regarding annuity endorsements, and presumably there would be changes to the tax code with regards to treatment of annuitized retirement income. Regardless, but optimistic, the PFP Group firmly believes this would be of positive impact to it’s clients looking to diversify retirement holdings.

Contact us today at contact@michiganfinancialadvisor.com for a complimentary Life Insurance, Annuity, Retirement or Investment plan review.   It is extremely important for individuals and businesses to be diligent in their plan review process at least on a semi annual if not quarterly basis.    Life Insurance or Annuity contracts should be reviewed at a minimum 5 year interval both for plan efficiency as well as growth strategy.   Investment and Retirement accounts should be reviewed semi-annually in order to maintain adequate asset diversification and tax advantages especially when ownership of mutual funds are involved.

Inheritance planning and strategy for both debts, assets and estates.

Not commonly thought of as a retirement vehicle for most taxpayers, cash value (Whole, Variable, Universal) life insurance policies are one of the greatest gifts from Congress and the IRS to those planning for retirement.   Cash value life insurance policies, such as whole life, variable life, and universal life insurance provide significant benefits over traditional retirement accounts such as 401k’s, IRA’s or Roth IRA’s.   Each of the traditional retirement plans are valuable to an overall retirement program, but contributions first to a cash value life insurance policy is by far the most tax advantaged strategy when saving for retirement.

In comparison to each, we have broken down the features of each type of plan for a visible comparison of benefits.

Contributions:

Traditional IRA – pre tax, limited contribution amounts based upon AGI

Roth IRA – after tax, limited contribution amounts based upon AGI

Life Insurance – after tax, unlimited contribution amounts (via premiums)

Annuities – after tax, unlimited contributions

401k – pre tax or after tax, limited contributions

Growth:

Traditional IRA – tax deferred

Roth IRA – tax deferred

Life Insurance – tax deferred

Annuities – tax deferred

401k – tax deferred

Distributions:

Traditional IRA – taxable, forced minimum distributions at retirement age

Roth IRA – tax free, no minimum withdrawals after 70 1/2

Life Insurance – tax free death benefit

Annuities – taxable

401k – taxable

Access Loans to accounts:

Traditional IRA – penalty applies

Roth IRA – penalty applies except for restricted purposes

401k – interest applied

Life Insurance – tax free

Annuities – taxable, penalty applies

As we can see, the cash value life insurance policy allows for unrestricted after tax contribution amounts based upon paid premiums that are not subject to limitations of adjusted gross income, as traditional retirement plans are.   As with most retirement plans the cash value investment component does accrue tax deferred.  The most beneficial aspect of the life insurance policy is that the cash value of the policy as it grows can be accessed via an unrestricted loan that is tax and penalty free to the insured.  Interest payments back to the policy are recommended, but not mandated, nor is the repayment of the loan.   In addition, the full value of the policy at the time of death is tax free to the beneficiaries named on the policy, which could be an individual or business.

From a retirement strategy planning perspective, the tax advantaged cash value life insurance policy provides far more flexibility with regards to contribution amounts and tax free access to the cash value in comparison to other retirement plans.

PFP Group specializes in life insurance advisory and contract procurement services on behalf of it’s clients.   Whether our clients have existing life insurance contracts that require a review or are seeking new or additional life insurance coverage, our advisors have an appropriate solution for their insurance needs.

Life insurance coverage is an extremely important component of a well designed retirement and estate plan.   The obvious advantage of adequate life insurance is the death benefit provided tax free to named beneficiaries of the policy.   The comfort in knowing that a spouse, children, trust or estate will be well provisioned in the event of death is invaluable to our clients.

Often overlooked however is the retirement and liquidity aspect of some life insurance policies that allow a “cash value” to be accumulated within the life insurance policy to be used for tax free loans.   These cash values can accumulate tax deferred over the life of the insurance policy via investment returns to provide a substantial gain to the value of the policy.   These policies can also contain additional provisions and riders to contribute self-paying premiums and accelerated death benefits in the case of a permanent disability.

A properly designed life insurance policy or policies can be the most substantial component of a successful retirement plan.   For example a paid up policy can be converted to an annuity which can provide retirement income for the life of the beneficiaries.

There are several benefits to business owners who properly insure themselves or other key employees of their business.   In the event of death, properly planned life insurance can protect the interests of the business by providing instant liquidity for equity buy-outs of business interests, or to preserve long term working capital for the business during succession.

The most important aspect of self insuring via life insurance is early planning.   As the life expectancy of insured’s decreases, the cost of adequate life insurance increases with appropriate risk.   PFP Group recommends to it’s clients adequate life insurance coverage in earlier years in order to take advantage of lower insurance costs and longer cash value accrual timelines to provide the maximum benefit to the overall financial stability of our clients asset portfolio.

Please email us at contact@michiganfinancialadvisor.com to receive more information about different life insurance policy options and to receive a quote for life insurance coverage.

PFP Group provides it’s clients will a wide range of financial planning services. Each “service” is available either a la carte as a one-time fee based engagement, or as part of an annual full service offering as part of an annual retainer fee.

Individuals who wish to have comprehensive financial planning, taking into account all aspects of their financial situation are those customers who retain our services on an annual basis. By taking into account the entire financial picture rather than just a single item can put our recommendations and financial plan in a much stronger position for our clients. Of particular importance here are items regarding tax strategy, sale and acquisitions of assets, and proper retirement or estate planning.

There is however great value in terms of both cost and importance to one time fee based clients who are looking for a first or even second opinion on any aspect of their total financial situation. Covered in single item engagements are “best practice” recommendations for building a solid financial plan with regards to any aspect of that plan. For example, the simple but important need for life insurance, or college savings, or an estate plan. Even more important are retirement savings plans either individual, self managed or through an employer, and the subsequent asset allocation and portfolio balance requirements based upon an individuals current “phase” of financial preparedness.

For example, the PFP Group main focus is preservation and growth of individual and business net worth. If you were to run the numbers on an individuals or business assets vs. liabilities you would get an accurate representation of net worth of that individual or business. It is important to both add gains to assets while limiting or eliminating liabilities as to the greatest extent possible in order to maximize total net worth.

As noted, much goes into making adjustments in either of those columns when calculating net worth. From the “asset” perspective, we look at items such as real estate holdings, retirement accounts, life insurance contracts, annuities in addition to more liquid assets such as cash on hand and savings. The phrase “financial planning” embodies addition, preservation and growth of these “assets” in order to positively impact net worth.

From a “liability” perspective as with most clients there are certain unavoidable obligations both current and projected that must be taken into account such as car loans and expected education costs for children. However in addition to the unavoidable obligations often rest unsecured debt such as charge accounts and other liabilities which can be consolidated and or mitigated in order to create a more positive net worth situation.

The most important objective for PFP Group advisors, insurance brokers and financial planners is to focus on the positive impact of our plan to our clients net worth. Working closely with our clients to understand their “wants” from a financial stability aspect is the most important component to our success.

By providing personal accountability and access, PFP Group has been successful in guiding it’s clients through challenging financial situations that simply have been ignored or absolved by larger financial planning firms and brokerage houses whose focus is on selling it’s customers “product” rather than advice which is truly in the best interest of their clients net worth.

For more information about our specific services, please select a service from the drop down menu on the right, or contact the PFP Group today to speak to an advisor that put your interests ahead of their own.