In this episode of Common Cents, Gunner DeLay discusses two important numbers you should know in estate planning. Learn other great tips and tricks of the financial planning trade and set up a face-to-face meeting with Gunner!
Now that the Olympics are over and all the medals have been handed out, it may time to consider gold and silver in a different light – as a part of your overall investment strategy. Even though people may know a lot about gold and silver as an accessory, they may not know how to enter the precious metals market. So let’s look at the basics of investing in gold and silver.
An investor can get into gold and silver in one of three ways:
1) they can purchase bullion and coins
2) they can purchase stocks, mutual funds and ETFs (exchange traded funds) of companies that own, or mine gold and silver,
3) they can purchase options and futures.
This last option involves a higher degree of risk and is best undertaken with the advice of a knowledgeable financial professional.
The spot price of precious metals is quoted in real time and is available to investors through a number of apps and websites, as well as live feeds on business channels. “Spot price” reflects the current value of an asset per ounce. If you are buying or selling gold and silver securities, spot price influences the unit price you pay. If you are buying physical gold and silver, you will pay a spread or premium over spot price. If you are selling, the spot price will be discounted by the spread.
A typical spread for buying gold is something close to $50 dollars over spot, and something close to $2 over spot for silver. However, you need to shop the spread because some dealers will be lower than others. In addition, there are some Internet dealers that have significantly lower spreads.
If you buy gold and silver securities through a financial advisor bear in mind that person is licensed and regulated by state and federal agencies. They are governed by standards of conduct that require that they act in your best interest. If you buy physical gold and silver from a dealer they are not licensed or regulated. Anyone can sell it. So do your due diligence and know who you are dealing with.
For people that have decided they want in on the gold and silver market, here are facts you may want to know – from September 2015 to September 2016 gold’s spot price fluctuated between $1050 to $1360 an ounce, while silver floated between $13.70 and $20.60. The historic high for gold is $1895 an ounce and silver peaked at close to $36.
Finally, if you are inclined to hold physical gold and silver, you will want to consider storage space. It should be adequate in size and secure. You don’t want a valued investment stored in a shoe box at the top of the closet.
We’ve all seen the infomercial on TV with the guy talking about “his” financial plan that can only go up in value and never go down. The offer sounds too good to be true, but he’s actually talking about a very common strategy for people who are close to, or already in retirement. That is – placing a portion of their retirement money in an Equity Indexed Annuity. You may not be familiar with that type of product so a brief explanation may be of some help.
Let’s start by explaining what an Equity Indexed Annuity is not. It is not a fixed rate annuity. That type of product is for a number of years, usually between 5 and 10, and guarantees a particular rate of return. Right now most fixed rate annuities provide a 2.5% to 2.85% return depending on the amount invested and the length of the contract. The upside – you are guaranteed a set rate of return no matter what the market does. The downside – you give up the flexibility to move your money if rates increase.
In addition, an Equity Indexed Annuity is not a variable annuity. A variable annuity combines the structure of an annuity with mutual funds investments. It is still a contract for a number of years, again usually between 5 and 10, but the rate of return is determined by the investments you select within the annuity platform. For instance, you could choose growth funds, income funds, sector funds, etc. The upside – there is no limit on your rate of return, and the gains are held within the annuity structure so you don’t have to pay capital gains tax until you withdraw your money. The downside – your return is only as good as the funds you select. If your funds go south – your nest egg goes south with them. Simply put, variable annuities involve more risk and some retirees may not feel comfortable taking a loss during retirement.
The Equity Indexed Annuity is an annuity, usually between 7 and 14 year in duration, that bases it rate of return upon an index, which is typically the S & P 500. If the index goes up, the annuity goes up in value with a cap, spread, or participation rate limiting the upside potential. If the index goes down, the annuity receives a 0% return for that year. The upside – it is a good choice for capital preservation. The value of the contract can only go up, and all gains are locked in. The downside – there is a limit on potential gains. If the market has a great year your returns will be limited. In addition, your funds will be committed to one financial strategy for a long period of time.
The final point on Equity Indexed Annuities is that many of these products have income riders that allow the annuitant to receive lifetime income from the annuity. This is a nice option for folks who are concerned about outliving their money, or want to know exactly how much they can count on during retirement. The income rider is not the same thing as annuitizing your contract. Annuitizing is a drastic step that includes the insurance company guaranteeing you a n sum certain for life, but once you die the balance of the contract goes to the insurance company instead of your family.
Consult a financial professional such as myself to find out more details on how these types of contracts work and see if they are a good fit for your situation.
Like many of you I am a big fan of the Dave Ramsey show. Dave gives very sound advice on reducing unnecessary spending, the need to save for a rainy day, and the goal to be debt free. However, not all the advice Dave gives is “on the money” (pardon the pun). He tends to have a once size fits all approach that fails to take into account the unique circumstances of each individual or family.
Let me explain. When it comes to life insurance he steadfastly sticks by his mantra – “buy term insurance and invest the rest”. Term insurance is relatively inexpensive and is in effect only for a period of years. The terms are typically 10, 20, or 30 years. After the term expires the insurance goes away. On the other hand, whole and universal life policies are considered permanent insurance because a person can keep the policy in force as long as they continue to pay the premium. In addition, these policies allow the owner to use the accumulated cash value inside the policy to help pay the premiums in whole or in part as they get older.
Here’s why Dave’s simplistic approach may not be the right advice for everyone. When a person’s term insurance expires one of three things will happen: 1) the policyholder will have to pay higher premiums to obtain new insurance, 2) the person will go uninsured because their health has deteriorated and they are uninsurable, or 3) they will go uninsured because cannot afford the increased cost of insurance.
Dave’s thinking is that if you have been investing, as well as paying the cost of your insurance, the value of your investments will eventually be enough to replace the face value of your insurance. Wow! That advice is built upon a whole lot of assumptions that may be wrong.
First, how can anyone predict what the market will do during your retirement? Suppose we have another market crash that cost retirees 30% of their asset value. You may not have any assets left to pass on to family members. Second, life happens. Divorce, job loss, aging parents, the cost of college, a sagging economy are all factors that can affect what a person is able to set aside during their career. If your retirement savings end up being less than what you hoped for, an expired term policy won’t do your family much good. Finally, it may be important for some people to leave a legacy beyond their family such as a charity or educational institution. Without a policy of insurance in force that opportunity may be lost.
The point is everyone’s financial situation is unique. Be sure when you put a financial plan together that the plan is one you can afford and that meets all your objectives. Just because Dave said it doesn’t mean it’s the right fit for you.
About six years ago, I limited the scope of my legal practice solely to estate and financial planning. After I obtained my securities and insurance licenses, I got up to speed on the latest issues involving estate and tax planning. Now I deal with everything from very small estates that only require a simple will to very complex estate plans that involve irrevocable trusts, family limited partnerships, and other strategies for tax-efficient wealth transfer. This is in addition to my work in retirement, income, and business planning.
Most laymen associate estate planning with the execution of a last will and testament. However, the process, if done correctly, involves so much more. The essentials of the most basic estate plan should include the following: 1) a mechanism for distribution of estate assets via a will, trust, or beneficiary deed; 2) a living will/health care directive; 3) a durable power of attorney; and 4) if a trust is prepared, it must be funded.
Attorneys who do not devote most of their practice to estate planning often make two common mistakes that can have devastating impact on their client. The first mistake is they fail to prepare a durable power of attorney (DPOA). A DPOA is a document that sets forth who has the authority to make decisions and sign documents for a person in the event they are alive, but no longer mentally competent. Typically spouses will name each other as their attorney-in-fact, with one or more of their children as the successors. Without this document, the only way a family can take action on behalf of a person that lacks mental capacity is to obtain a guardianship. That process can be burdensome, expensive, and time consuming.
The second common mistake is they fail to fund a trust. The purpose of a trust is to distribute assets to beneficiaries without the time and expense of probate. Time and again, I have clients that want me to review their estate plan and the first thing I notice is that the trust was never funded by the attorney. Funding a trust means that you have placed all your assets in the name of the trust. This would include deeding property in the name of the trust, changing the designation on your investment and banking accounts to the trust, and making the trust the beneficiary of your life insurance policy. If a trust is not funded, probate becomes necessary and that means an attorney was paid thousands of dollars for nothing.
That is why I contend not all attorneys are created equal. Someone may be licensed to practice law, but fail to have the requisite knowledge to adequately prepare an estate plan that is tailored to a client’s needs. So if you need the services of an estate planning attorney make sure you ask them how much of their practice is devoted to estate planning, or check out their website to see what points of their practice they emphasize. That simple inquiry could save your family time, expense, and unnecessary heartache down the road.