MONEY Master the Game: 7 Simple Steps to Financial Freedom (67 page)

To understand how powerful this arrangement really is, I came up with a metaphor when I was having dinner with a buddy at the Wynn Encore in Las Vegas. I looked out over the casino floor and said to my friend, “Imagine if this casino had a special gaming table reserved only for VIPs. The rules would be that you could gamble all night, and you would never lose a dollar. No matter what happened, Steve Wynn would guarantee that you would leave with what you started—a guarantee of your principal.

“If you win, you get to keep all your gains with the exception that the house gets to keep 1.5% of your winnings. How much would you bet?
How long would you play for if you knew you couldn’t lose, and if you won, you just had to pay a small portion of your upside?”

He smiled and said, “As much I could, for as long as I could!” I laughed. “Me too!” That’s exactly what this fixed indexed annuity does, and now it’s no longer limited to older people with lots of money.

• 
There are also no annual management fees or sales charges that come out of your account.

• 
If you’d like to have a guaranteed income for life, you can select that optional income rider as well.
When you do this, you’ll have two accounts that compete with each other: (1) a base account that accumulates as the stock market grows and locks in its returns each year, as we described earlier; and (2) an income account where, depending upon the issuing insurance company, you’ll have a guaranteed rate of return or a combination of a guarantee and market performance. To your benefit, the income you’ll receive will be based on whichever account is larger at the time you decide you want the income.

Most importantly, on top of all this, Cody was able to influence the insurance companies to eliminate the lump-sum payment and make this financial vehicle available to almost anyone.
The days of needing $25,000 to $50,000 to get started are gone. Now you can start with a small initial deposit as low
as $300. You can even set up the convenience of a monthly auto-deduction program from a checking account so that your Freedom Fund is growing every month into a “personal pension”—an income for life.

Even if you have a very small amount or no amount in other investments, this product can be a phenomenal place to start. Why? Because it gives you the upside of the stock market index without the downside.
Imagine knowing that for every dollar you contribute, you are guaranteeing yourself a lifetime income stream.
The more you save, the higher your income will be. And you are guaranteed not to lose your deposits!

Since there are thousands of income annuity products with a wide range of income payouts, Cody and his team have established a website to educate and empower you when it comes to finding and selecting the right annuity products for your specific situation:
www.lifetimeincome.com
.

By visiting LifetimeIncome, just a few simple steps will allow you to quickly and easily set up your lifetime income plan.
Within seconds, you can calculate your potential future income based on how much you can afford to contribute. Regardless of your age, the system will reveal the best approach for you and show you the most competitive income payouts available.
So whether you are younger and want a flexible, smaller monthly contribution, or if you are over 50 and have a lump sum and are looking for longevity insurance, the system will guide you to the best income solution. You have the option to set it up online, over the phone with a specialist, or be connected to an annuity advisor in your hometown.
Lifetime Income has a network of over 500 annuity specialists in all 50 states.
It will also provide a free review and analysis of any existing annuities you might have to see if you should hang on to the one you have or transfer your account value to a different insurance company in a tax-free exchange.

As I mentioned, when coupled with the All Seasons portfolio, the right lifetime income product is a powerful tool! Lifetime Income is the exclusive annuity provider for Stronghold. So if an annuity is just a portion of your overall asset allocation (and just part of your Security Bucket), you can also access these same products through Stronghold. It will connect you to an annuity specialist.

TOOLS OF THE .001%

We have come a long way! Not only do we have the mind-set of an insider, we have the tools of the insiders! In this section alone, we have learned a powerful portfolio model from icon Ray Dalio that has proven resilient throughout every economic season since 1925. And most people have to invest $100 million to get his insights! We can be confident that his portfolio model will survive and over the long term thrive in all environments.

We have also learned how correctly structured income insurance, an annuity, can give us a paycheck for life without having to work for it. And not only that, but with the right fixed indexed annuity, our deposits can participate in 100% of the upside of the market/index but avoid losses when the market goes down! A Security Bucket with some excitement. Although there are many approaches to achieve financial freedom, the one-two punch of an All Seasons portfolio and the certainty of a guaranteed lifetime income stream is a powerful combination for peace of mind.

But once you build your wealth, you also must protect it for you and your children. The ultrawealthy protect their wealth with an entourage of extremely sophisticated advisors. So who or what do they protect it from?
Let’s find out the secrets of the ultrawealthy in chapter 5.5!

FREQUENTLY ASKED QUESTIONS

Here are a handful of common questions that seem to come up when people learn about fixed indexed annuities:

What happens if I die “early”?

If you die before turning on your income stream, your entire account balance is left to your heirs. This is a
huge
benefit over a traditional income annuity. When you do decide to eventually turn on your lifetime income stream (with a simple phone call), you
do not
forfeit your entire account to the insurance company. Your heirs would still get your account balance minus any income payments you had taken to that point.

Can I take out money in case of an emergency?

Most FIAs allow you to withdraw up to 10% to 15% of your account without any penalty or surrender charge. Keep in mind, if you make this withdrawal prior to age 59
¹
/
₂
, you will be charged a 10% penalty by the IRS, which is standard for any investment that gives you tax deferral on the growth. If you need all your money back, you can surrender your annuity and get your money out (plus any growth). However, this withdrawal may incur a surrender charge, depending on how long you have owned the annuity. A surrender charge is really a self-imposed penalty because you are taking back your money early. The typical schedule will start at 10% and go down by 1% per year until you reach 0%. So if you have held the annuity for five years, you would have a 5% charge if you surrender the contract and get back all your money. Any money invested in this vehicle should be considered money invested for the long term.

What are the fees within an FIA?

There are no annual management fees withdrawn from your account. However, if you select the guaranteed lifetime income rider, the annual fee for this ranges between 0.75% and 1.25% annually, depending on each company’s individual offerings.

Can I put my IRA money into an annuity?

Yes, you can use money from your IRA (or Roth IRA), or you can also use after-tax dollars (money you have already paid tax on) to fund an annuity. This scenario is also known as qualified or nonqualified dollars, both of which can be used.

What is the cap on my account growth, and how is it determined?

The cap, the ceiling on how much of the market growth you get to keep, is typically tied to interest rates. If interest rates are higher, the cap is high (and vice versa). Some newer products offer 100% upside with no cap,
but
they take a small spread, which is a share of your upside/profits. If the market is up 10%, you might get 8.75% credited to your account (which means the insurer kept a 1.25% spread). But if the market goes down, it doesn’t
take anything, and you don’t lose a dime. I like these uncapped strategies because they give the highest upside potential in a given year.

To what underlying markets will my account be “linked”?

The most popular index is the S&P 500. But newer indexes are being added quite frequently. For example, some accounts can be linked to the Barclays Dynamic Balanced Index (a mix of stocks and bonds) or the Morgan Stanley Dynamic Allocation Index (a mix of 12 different sectors). Some indexes are even tied to commodities.

What factors will determine how much income I get?

The amount that you contribute to the annuity, the length of time before you decide to access your income stream, and your age at the time your income begins are the primary factors that will ultimately contribute to the amount of income you’ll receive. However, the biggest factor is the product you select. Every annuity contract is different in the amount of contractually guaranteed income it will provide, so it’s important you understand this before you pull the trigger.

What is the tax treatment of an FIA?

The growth within your FIA is tax deferred. When you turn on the income stream, you will be paying ordinary income tax rates on the lifetime income payments. Because the government is giving you tax deferral, it will penalize you if you take money out before you reach age 59. If you own the FIA within a Roth IRA, there no will be no tax on either the gains or the lifetime income stream.

Here’s what you can avoid with a fixed index annuity:
the benefits of getting the upside without the downside becomes incredibly powerful when you look back at the history of Wall Street crashes. What’s astonishing is just how long it took for the market to recover—for investors to get back to breakeven. Just for fun, take a look at some of the history of the stock market crashes—and remember, with this type of investment, you can avoid all of these.

1901–1903

• The Dow fell 46 percent.

• Recovered by July 1905.

• Total time to recovery: two years.

1906–1907

• The Dow fell 49 percent.

• Recovered by September 1916.

• Total time to recovery: nine years.

1916–1917

• The Dow fell 40 percent.

• Recovered by November 1919.

• Total time to recovery: two years.

1919–1921

• The Dow fell 47 percent.

• Recovered by November 1924.

• Total time to recovery: three years.

1929–1932

• The Dow fell 89 percent.

• Recovered by November 1954.

• Total time to recovery: 22 years.

1939–1942

• The Dow fell 40 percent.

• Recovered by January 1945.

• Total time to recovery: three years.

1973–1974

• The Dow fell 45 percent.

• Recovered by December 1982.

• Total time to recovery: eight years.

2000–2002

• The Dow fell 36 percent.

• Recovered by September 2006.

• Total time to recovery: four years.

2008–2009

• The Dow fell 52 percent.

• Recovered by April 2011.

• Total time to recovery: two years.

18
. The effective tax on income from immediate annuities is dependent on what the IRS calls the
exclusion ratio.
A portion of your income payments are deemed a return of your principal and thus “excluded” from tax.

19
. Obviously, if I start the annuity income sooner, at 65 or 70, the income I receive will be less than at 85.

20
. Remember, there are state insurance guarantees as well as corporate guarantees.

21
. Participation rates and caps will depend on the individual products.

CHAPTER 5.5

SECRETS OF THE ULTRAWEALTHY (THAT YOU CAN USE TOO!)

It’s viewed as an insider’s secret for the affluent: a legal way to invest . . . all without paying taxes on the gains.

—
NEW YORK TIMES,
February 9, 2011

A NEW WORLD RECORD

In early 2014 the
Guinness Book of World Records
announced that a new world record had been established. No, it wasn’t for the Tallest Man in the World, or the World’s Longest Fingernails. It was a record that went largely unnoticed:

“Mystery Billionaire Buys Record-Breaking $201 Million Life Insurance Policy.”

Why in the world would a billionaire buy life insurance? Won’t his kids be just fine if he passes away prematurely? Or was the media missing the point? Believe it or not, the ultrawealthy do indeed buy astronomical amounts of life insurance, but it’s not the billionaires who buy the most. The biggest buyers are banks and large corporations, from
Wal-Mart
to
Wells Fargo.
As an example, Wells Fargo’s balance sheet shows $18.7 billion of its Tier 1 capital deposited in life insurance cash value (as of May 27, 2014). By the way, Tier 1 capital is the core measure of a bank’s financial strength! Contrary to what the media says, corporations and the ultrawealthy are not looking to benefit from anyone’s death.
What they really want is a place to park their cash in an IRS-sanctioned vehicle that allows them to grow their investments tax free.
Sound too good to be true? In fact, it’s very much like a Roth IRA in terms of tax treatment. You pay taxes when you earn your money (income), but once you deposit your after-tax dollars within a specific type of life insurance policy, the IRS says you aren’t required to pay taxes
as it grows; and if structured correctly (more below), you aren’t required to pay taxes when you pull out money. So while it
is
life insurance, it’s
really
designed to benefit you while you are alive!