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It’s Not Magic

Setbacks, gaps, lost money, collaboration, offsets. What is Joel talking about? Financial professionals need to utilize the effects of compounding math and advanced integration to see what to do. Think about your awareness and how you would handle this common example:

Bill and Jan have been plagued with setbacks and are now only 10 years from retirement. They figure their savings and his pension will not be enough to live on, even with Social Security retirement benefits. Let’s look first at the pension options Bill will use without our planning. By pension, I mean a defined guaranteed monthly income stream.

If Bill wants the highest pension payout, he can retire on the life only-option, which pays $2,000 a month for as long as he lives. The downside is that when he dies, it stops and Jan is paid nothing from the pension. All she would have is their remaining savings plus Social Security benefits. She could also work for additional income.

If Bill is willing to give up $500 a month, he can retire on the 75% survivor pension option. In this scenario, both Bill and Jan will receive $1,500 a month for life regardless of who dies first, but at what cost? $500 x 12 = $6,000 per year. The compounded loss comes out to approximately $745,000 if they both live 25 years into retirement.

The risk of that gap is a two sided coin. If Bill lives only one day on the life-only option, Jan loses his pension for good. If Jan predeceases Bill, he can’t go back and regain the life-only benefit option income he lost and is usually stuck with a joint payout for life.

What if Bill lives to a ripe old age and still predeceases Jan? The mortality tables show Jan is more likely to outlive Bill by at least three years. If she has a healthy family history this could be close to reality. Is it worth it to take the joint and survivor option for twenty or thirty years to provide three years of benefits to Jan?

There are several other considerations they should address. I will list a few.

This couple has a tough decision to make and they may not know if it’s worth it to be creative. A conceptual planner comes along and shows this concept to them on a piece of paper or a pretty visual.

Their planner explains they can buy enough life insurance on Bill to take the life-only option to satisfy both dilemmas. Bill and Jan receive $2,000 per month plus their other retirement sources. If Bill dies first, Jan’s standard of living is not impacted. If Jan dies first, Bill retains control of the policy values and benefits and continues the $2,000 payout.

Is this a bad plan? In theory and simple math, it may be a good plan, but supporting numbers are inaccurate when baseline factors are incomplete.

This decision cannot be accurately analyzed by penciling out a presentation or with the use of uncoordinated planning software, ideas or planners. It must be coordinated and integrated before Bill, Jan and the planner can tell…more on that later.

Some important considerations are that the cost of the insurance might be too high. The couple may not like insurance. Is Bill even insurable? Can insurance keep up with inflation? How much insurance is really required to accomplish this?

Integration means how will every material asset and move Bill and Jan have and do respectively affect this decision? What income do they want? How will they take their other incomes? What do they want to do during retirement? Do they plan to work or travel on the side? What are the tax and legal implications? They may want integrated counsel.

Coordinated evaluation is the answer. With the right knowledge and proper tools, it becomes apparent. Without them, you will be hard pressed to say which option will work best even with a straight forward conceptual or uncoordinated analysis like the one I just outlined.

Which is the setback now? Taking the joint or the life option? The answer is it depends on many factors. A good planner will account for as many of the variables as possible separately and then be able to integrate them to see how each affects the other.

Ninety-nine percent of the software that financial professionals use does not have this kind of flexibility. Even if they have the right software, it’s like learning a new language to use it. Anyone who claims otherwise is bluffing, because there are several other calculations that factor into it.

The problem is what software are you using? What does your planner use? What do his colleagues use? What did the other stakeholders in your various plans use? Yes, you likely have several financial plans and have not considered them such. How can you know their impact if you don’t account for their flexibility or lack thereof?

Let's take another example.  Here we are leveraging Randy and Rachel's home so that they end up owning it free and clear, and are able to manage their risk tolerances to apply homeownership cash flow for future financial needs.  How should one go about this?

Option 1:  Pay the normal 30 year or full term amortized payment.

Option 2:  Pay biweekly or apply 1 extra payment against principal per year and invest the payment amount after the mortgage is paid off.

Option 3:  Pay the 30 year term and apply 1 extra payment per year or a discretionary amount into a tax-free financial instrument with the option to payoff the mortgage early, draw funds for emergencies, accumulation goals, or retirement supplement unburdened by reapplication factors.  Life insurance may integrate with this in a situation like Bill and Jan's above.

Option 4:  Use debt (i.e. 2nd mortgage or credit card) against itself and/or discretionary income algorhythmically to accelerate early mortgage payoff afterwards applying the total monthly amounts to an accumulation financial instrument.

Option 5:  Debt rollup other bill payments against mortgage principal and apply the total debt rollup payments after the mortgage and debts are paid off into an accumulation financial instrument.


Note that options 1, 4 and 5 can often be done without additional cashflow requirements.

Randy and Rachel can partially assess their risk tolerance and the management factors
that affect which option or variation would work best for them by asking some key questions.

  • When do they want their home paid off by?  For instance, a 50 year old may not want to make mortgage payments till they are 80 years old; and some people have reasons to be dead set on owning their home free and clear as soon as possible no matter what other options are available.
  • Which option process are they comfortable enough with to stick to?  Each option requires some kind of disciplined give and take.  They may be tempted to take an option that will accumulate more assets long term, but if they can't live with the process the plan is predestined to fail.
  • Do they itemize their tax return to receive mortgage interest tax writeoffs?  Option 3 especially utilizes this when an interest earnings account rate exceeds the after tax mortgage rate (mortgage rate minus the mortgage interest tax bracket rate).
  • Can they afford 1 extra mortgage payment or discretionary amount per year?  Although options 2 -5 all can use this concept if Randy and Rachel can't do it they are stuck with a full term mortgage payoff period, except in the case of option 4.
  • How much time is needed to focus their resources on remaining retirement preparations?  If their current trajectory cannot provide a living throughout retirement determining a suitable option will improve their chances.

In these examples, what is the bottom line?  There are several other variation possibilities and pros and cons to consider.  Our services address key variables that produce results you can live with that respect and factor in the wisdom of your preferences.

Professional experience is a cost-effective alternative, because it saves the hassle of meeting all of these requirements yourself.  Many are already playing catch up and don’t have time to monitor this and the ever growing financial market place. We know where to look and how to make things work better. 

Thousands of dollars and hours were invested in integration research to verify what fits and what doesn't, including “how-to” software.  Periodically, I explain important variables identified in your plan that bring integration.  Our Services simplify all of these processes on your end.

Other references on this subject are
Professional Collaboration Methods and What Is Your Biggest Risk?


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