Sadly, the current state of corporate financial statements is threatening to cut the lifeline to the healthier workplace. The forward-thinking trend to add wellness programs into the company environment is being threatened, despite the fact that workplace wellness programs still provide all of the benefits they promised and more.

Not very long ago, adding a wellness program to the workplace and reaping its benefits was unarguable. They created a clear and simple win-win scenario for all… Healthier, happier employees, higher productivity, fewer sick days, and lower health care costs.

Nothing has changed in terms of what workplace wellness programs have to offer, except that perhaps over time, they’ve gotten even better.

Adding a wellness program to the workplace will still relieve stress, increase productivity, improve health, reduce amount of sick time, and save money on health care costs, and with the costs of medical care certain to rise in the future, what they can deliver is more important now than ever.

But, even though the promises of wellness programs still hold true, they are being cut by many companies due to a need to satisfy lower budgets.  So, the question is… can these programs remain a corporate priority by producing results that are seen at the bottom-line?

We Could All Use Some Wellness

It’s no secret that our society, as a whole, could use more healthy habits in our daily routines.  Since most American adults spend more time at work that anywhere else, the workplace is the logical place to promote better health and wellness.

The U.S. Department of Health and Human Services research shows that:

• 65% of Americans are overweight or obese

• 5% of Americans get little or no exercise

• 7 out of 10 Americans die each year of a preventable chronic disease

In fact, approximately 40 percent of all deaths in the United States are premature (at least 900,000 deaths each year) and are due to unhealthy lifestyle choices such as tobacco use, poor diet, sedentary lifestyles, misuse of alcohol and drugs, and accidents.

People with healthier lifestyles live an average of 6 to 9 years longer, postpone disability by nine years and compress disability into fewer years at the end of life.  (Adapted from The Health Promotion First Act prepared by David Anderson, Ph.D., StayWell Health Management)

By creating a worksite that supports and encourages healthy living, we greatly improve the likelihood that people will change behaviors, live healthier and more productive lives, and require less medical care, which is the only surefire recipe for containing future health care costs.

Worksite Wellness Works

Larry S. Chapman, for his book entitled “Proof Positive: An Analysis of the Cost-Effectiveness of Wellness”, reviewed 42 worksite health promotion and wellness programs, covering 370,558 participants with an average program length of 3.60 years and 4.7 program components. Chapman found that worksite health promotion and wellness programs can:

• Reduce Sick Leave by 27.8%

• Reduce Health Costs by 28.7%

• Reduce Disability Costs by 33.5%

• Reduce Workers Comp Costs by 33.5%

• Save $5.50 in cost for every dollar invested.

According to WellnessProposals.com, traditional methods used by businesses to control healthcare costs such as; reducing benefits, increasing employee contributions and the more recent shift to consumer driven health plans are all short-term fixes that fail to address the primary driver of the soaring cost of healthcare – namely inadequate investment in health through primary prevention, health risk management and disease management.  Prevention is much less costly than treatment and would mean a drastic drop in revenue and profits for our healthcare system.

Yet, USAtoday.com recently reported that companies, desperate to slice perceived fat from their budgets, increasingly are targeting workplace wellness programs. Smoking cessation and weight-loss programs are among those being considered for the chopping block, says Laurel Pickering, executive director of the New York Business Group on Health, a coalition representing employers on health benefit issues.

And, workers — stressed by the economic downturn — these days are often more focused on work and finances than eating right and exercising.

Nearly half of the employees recently surveyed by the National Business Group on Health said that work demands prevent them from having a healthier life. That poll was taken even prior to the full brunt of the economic downturn was being felt.

Almost 60% of those recently surveyed by the American Heart Association said the economy has affected their ability to take care of their health. Many are delaying preventive-care appointments, not taking medications, skipping the dentist or canceling gym memberships.

Is there really any chance whatsoever that a less healthy workforce will be what companies need to weather the economic storm.  Survey employees.  Most employees will emphatically opt to keep a wellness program on-site.  And you can make it work by encouraging increased participation and continually rewarding positive results.

At the very least, these basic wellness practices should not be ignored by any corporation that is looking for a healthier bottom-line:

Fitness and Exercise Programs

Individual Wellness Profiles

Preventive Health Testings and Immunizations

Tobacco-cessation Programs

Weight Loss and Weight Management Programs

Self-Care Programs

By keeping wellness in the workplace one of your company’s top priorities, your employees can only be stronger, happier, healthier and more productive.  Investment in the preventive benefits of workplace wellness programs can allow your company to reap the financial incentives through savings on medical care costs, disability pay, rate of absenteeism, turnover, safety problems and higher levels of productivity.  Cutting such programs without careful consideration of their inherent benefits, and you are likely to find that whatever was saved, increased your costs in other areas.

Well?… Has your company incorporated a wellness program into the daily routine of your employees?  Or is yours one of the many companies that has had all the right intentions to start a program, but worksite wellness just hasn’t made it to the top of the latest meeting agendas?  Or, there’s no room in the budget for it?  Or, your company actually thinks such programs will not make any real difference?

No matter how long you put it off, the fact is that health care costs are going to continue to go up no matter what we try to do about it, and wellness programs can help.  By keeping your workforce happier and more productive, wellness programs provide a real opportunity to contain costs. So, if you haven’t adopted a workplace wellness program yet, perhaps you should reconsider.

The fact about wellness programs is that it’s easy to begin one.  One of the simplest and most popular to incorporate into your work setting is yoga.  Yoga in the workplace is the perfect solution for any size company and it doesn’t require you bending over backwards to start a program.

There are many solid reasons to start a yoga wellness program at work, including the fact that your employees reap the physical benefits while you, the employer, can reap the fiscal rewards.

In fact, so many companies consider yoga important enough to offer as a regular employee benefit, that if you’re not offering it, we suggest you be more flexible in your thinking.

First, look for an instructor who will visit the workplace.  There are plenty available when you do some research.  Be sure to look for one with the right qualifications, including registration with the Yoga Alliance, and a certification that requires at least 200 hours of training in yoga techniques and teaching.

Next, get your employees excited and you will soon see that participation is contagious.  Send out memos, make announcements, create flyers and post sign-up sheets.  When employees see that fellow employees are interested, they will become interested.  Actually, when it comes down to it, most all of your employees will welcome the stimulating, beneficial break in their workday.

A few other nice things about yoga are that all you need are comfortable clothes, it can be performed almost anywhere, and it can be done at any time of the day.  A typical session can start prior to the workday, during lunch or even during break times.  Ideally, a session would be 30-60 minutes, but 15-20 minutes twice a day during breaks can also be effective.

Remember, there is no equipment or experience necessary and just about everyone can do yoga, no matter what their fitness level.  Of course, you should encourage employees to talk to their doctor before starting any exercise routine.  And, tell your employees to inform the instructor of any orthopedic problems or other special needs they have before the class begins.  Depending on age, overall health status and/or physical circumstances, some employees might require that the instructor modify portions of the class to meet their needs.

Let Us Pose it to You this Way

The benefits of adopting a yoga program into your workout routine, such as improved cardiovascular circulation, toning and strengthening of muscles and increased flexibility are well-known, but here are some benefits specific to a regular workplace yoga routine:

• Promotes increased stamina, making it easier to get through a long workday.

• Helps to reduce job-related anxiety and stress.

• Improves mental clarity, aiding in the decision-making process.

• Helps with physical, as well as mental, balance.

• Creates a feeling of unity, which leads to better communication and teamwork.

According to YogaJournal.com participants of workplace yoga can:

1. Easily transition between yoga classes and work commitments.
2. Return to work more relaxed.
3. Think more clearly following the class(es).

Finally, encouraging your employees to make the new yoga routine a long-term commitment, can help them to obtain the best results, because as is true with other workout routines, consistency is key.  Yoga should be practiced at least a few times per week, and it can take up to 6 weeks to fully experience the difference that yoga can provide.

Clearly, the benefits that one gains from participating in a yoga wellness program are very good.  The benefits that can accrue to the company as a result of instituting a workplace wellness yoga program can be great.  They include:

• Increased overall employee morale, which means happier, healthier and more productive employees.

• Boosts employees’ immune systems, which leads to reduced employee sick time and the need for medical care.

• Helps attract more top-notch employees, keep them, and keep them healthy.

• Keeps healthcare costs down.

It Makes Physical and Fiscal Sense

Of course your group benefits broker or consultant can help control your company’s health plan costs as well, but requiring less medical care is a sound starting point.

So, if you’re one of those that thinks that workplace wellness programs never lead to much, maybe you just haven’t had the right consultant advising you, because at The Rule Group, when we say “wellness,” we’re not just talking about smoking cessation pamphlets in the break room… we’re talking about helping you achieve the tangible and substantial benefits of going to the mat… the yoga mat… for healthier, happier, and more productive employees.

Namaste…

Introduction

The literature describing Variable Universal Life (VUL) insurance policies is not often easy to understand. Like all investment vehicles, VULs have both their advocates and detractors. The advocates emphasize the VUL as the flexible premium policy that combines protection against premature death with a type of savings vehicle with tax advantages, such as tax-deferred investment gains and the ability to structure tax-free withdrawals in retirement. The detractors point to the costs of VUL policies as being a drag on investment performance.

The truth is that VULs are not particularly difficult to understand. Essentially, when you purchase a VUL, you’re

buying term life insurance and investing in stock and/or bond funds at the same time in order to gain the tax advantages offered by the policy.

Will your regular income and capital gains tax rates be higher or lower in future years? No one knows. The thinking has always been that once you retire, you’ll be in a lower tax bracket, but for today’s higher income individuals, this is likely not to be the case. So, because over time, a VUL’s costs are much less than the taxes that would result from investments made outside the policy, many people will benefit from putting some portion of their retirement savings into a VUL

.

The following points provide a simplified overview of the VUL so that investors can gain a fundamental understanding of their key benefits and role in creating retirement income.

1. Variable Universal Life is a form of cash-value life insurance. Unlike either term or traditional whole-life insurance, VUL policies allow the policyholders to choose where their premiums are invested from a menu of investment funds offered by the insurance carrier.

2. The term “variable” is used because in a VUL the policy’s cash value, and the amount of the death benefit “varies” based on the policy owner’s investment returns.

3. Like all life insurance policies, a VUL provides a payout in the event of the policyholder’s death, which is referred to as the “death benefit”.

4. The VUL offers policyholders the important advantages of tax-deferred investment growth and, properly structured, tax-free withdrawals. So, unlike the annual capital gains and other income taxes that result from successful investments in mutual funds, the investments within a VUL grow on a tax-deferred basis.

5. And, through properly structured policy loans, which are technically borrowed against the policy’s death benefit, the owner of a VUL can receive withdrawals during his or her retirement years and never pay tax on that

money. Loans, withdrawals and poor performance of the underlying funds may reduce the death benefit and

cash value. If excessive, they may cause the policy to lapse, unless the owner contributes additional premium

to keep the policy in force. Lapse of the policy can cause the loss of the death benefit and potential adverse

income tax consequences.

6. The term “universal” is used to refer to the policy’s annual premiums not being fi xed, but rather varied within a certain range.

7. Just like any investment in the equities markets, there is market risk when investing inside a VUL, and policy owners who purchase a VUL in order to receive tax-free income in retirement should follow the same guidelines they would apply to their other investments in the stock and bond markets.

8. The costs of purchasing a VUL include investment management fees and sales commissions, just as do various

other investments including some mutual funds, but in a VUL you are also paying annual fees and expenses and a certain amount for the policy’s death benefit. While these charges do reduce the amounts earned as a result of the policyholder’s investment strategy, they should be compared against the benefits of the VUL’s tax advantages.

9. Because of the fees charged by a VUL, a policyholder may have to wait several years before the policy’s cash value exceeds the premium amounts paid.

10. A VUL will also impose “surrender charges” in the early years. For these reasons, VULs should only be considered for “long-term” savings.

In Conclusion…

Think of your money as having three distinct phases. The first is the “saving phase,” during which you set aside

some portion of your income for use in the future. The second phase is the “accumulation phase,” during which you seek the best possible investment returns. And the third phase is the “distribution phase,” and that’s when your accumulated wealth is used to generate monthly income, after you retire and your paychecks from work have stopped.

For retiring baby boomers, those less than twenty-years from retirement age, it’s important to understand that, in

order to enjoy their comfortable retirement, they must answer the question: How much money will I receive every month once I stop receiving a paycheck? And to answer this question, it should be understood that future tax rates present at least as much, if not more of a threat, than do investment returns… within reason, of course.

The bottom-line is that a VUL provides investors with access to investing in the market, through a vehicle that also allows for both tax-deferred growth, and tax-free income during retirement.

And, in our opinion, all successful individuals would benefit from the hedge against higher taxes in the future years that is provided as a result of some portion of their retirement income being available on a tax-free basis once they retire.

Simple as that.

Variable products are subject to investment risk, including possible loss of principal.

Before investing, carefully consider the investment objectives, risks, limitations, benefits, charges and expenses

of the product and underlying investment options.

Simplifying the discussion and dispelling the myths about the role annuities play today in a diversified and balanced investment portfolio.

“Annuities are expensive.” “You’re always better off investing directly in mutual funds than through an annuity contract.”

“Annuities have hidden costs you don’t want, or insurance expenses that you don’t need.” “You won’t do as well investing through an annuity as you will directly investing in the markets.”

If you’ve heard any or all of these statements about annuities, then although you’re certainly not alone, you are likely to have been misinformed to at least some degree. There’s a lot of information about annuities out there, and in our view, much of it is confusing and some simply misleading.

Still, annuities are growing in popularity every year, largely as a result of millions of baby boomers moving ever closer to retirement age, and now seeking protection from market downturns, and guarantees of income during retirement, or for life. At PRB Financial, we believe that it’s important for investors over age 45 to gain an accurate and unbiased understanding of the advantages offered by different types of annuities.

Okay, so what is an annuity?

An annuity is simply a contract between you and an insurance company. People invest money into an annuity contract for a whole host of reasons, which is why there are many different types of annuities offered.

It’s perhaps first easiest to think of annuities as being “immediate” or “deferred”.

Immediate annuities provide for the investor (or purchaser) to start receiving income from the annuity contract immediately after depositing funds into that annuity. The investor may elect to receive income distributions for a set number of years or for life.

Deferred annuities allow an investor to contribute to the annuity contract over many years, and delay or “defer” receiving income from that contract until some point in the future.

Next, you can think of annuities as being either “fixed” or “variable”.

Fixed annuities offer to pay investors a fixed, or guaranteed rate of interest. Variable annuities, on the other hand, are considered to be securities with all guarantees based on the claims paying ability of the issuing company.

The benefits of investing through annuity contracts…

Tax deferral is one of the primary reasons investors choose to invest through annuity contracts, but there are other benefits, as well.

Tax deferral simply means that you don’t pay taxes on the money invested into a tax-deferred annuity until you begin to withdraw funds from the contract. The money you invest also grows on a tax-deferred basis. Unlike 401(k) plans, contributions to an annuity are made with after-tax dollars, and without the limits on annual contributions imposed by such retirement savings plans.

Additionally, fixed annuities allow an investor, through the use of riders and additional fees, to choose the features he or she values most. Some of those features can include receiving lifetime income, adjustments for inflation in future years, guaranteed return of principal, and/or the ability to transfer the annuity to another under certain circumstances, similar to the naming of a beneficiary in a life insurance policy.

The returns earned within a variable annuity, on the other hand, will vary depending on investment performance. The investment funds within an annuity are referred to as “sub-accounts” or “separate accounts,” because the assets held are “separate” from the insurance carrier’s other investment accounts and cash reserves. Variable annuities, therefore, have the potential to deliver higher returns than an insurance carrier would offer through its fixed or guaranteed annuities, but just like investments in stocks or mutual funds, they can also result in lower returns or losses.

Lastly, some annuities are “qualified,” and others are considered “nonqualified”. Qualified annuities can be used to rollover funds from another qualified retirement savings vehicle, such as a 401(k), without tax consequences. The tax benefits are provided by the IRA.

Some of today’s variable annuities, however, offer investors both the upside of investment in the equities markets, but with riders that guarantee a minimum annual return upon which a lifetime income stream can be based. This type of annuity contract can provide the best of both worlds, as successful investors can benefit from market-based returns, while being protected from significant or sustained market corrections. This report will focus on variable annuities, as they offer investors market-based returns, as opposed to fixed rates.

How Much Do Variable Annuities Cost… As Compared With Mutual Funds?

Of course, just as is the case when investing in a mutual fund, there are costs that must be paid when investing through an annuity contract.

Mutual fund investments impose a variety of charges, such as: operating expenses, marketing/distribution fees, transactional costs, and sales loads.

1. Operating expenses include fees to cover investment management, record keeping, custodial services, taxes, legal, and accounting/auditing services.

2. Marketing or distribution fees (referred to as “12b-1” fees) are also charged against a fund’s performance.

3. Transactional costs, which include brokerage fees incurred by the fund when buying and selling the fund’s underlying securities, and the “spread,” or difference between the “bid” and “ask” prices. These transactional costs, although not included in the fund’s expense ratio, would certainly seem to qualify as “operational expenses” as they can be significant when funds experience higher turnover in the securities held within the fund.

4. Lastly, some mutual funds impose sales charges (referred to as “loads”) and the amount of these loads is also not generally included in a fund’s expense ratio.

According to the Securities and Exchange Commission (“SEC”), the total costs imposed by mutual funds can be as high as 2%, with international funds generally costing more because they require greater levels of investment management expertise. The SEC pegs the average cost of a domestic mutual fund at roughly 1.5% (but remember, this figure does NOT take into account the fund’s transactional costs, or any sales loads that may or may not be applicable).

When investing in a variable annuity, investors pay the same type of investment management fees incurred when investing in mutual funds, plus some additional amounts for whatever “guarantees” (called “riders”) that are selected, or death benefits purchased. Additionally, annuities are not designed for short-term investors, rather they are intended to be longer-term investments and therefore impose surrender charges, generally 10% during the first ten years. Clearly, the money you invest in an annuity should be money you don’t plan to access until, or during, retirement.

It may surprise you to learn that, according to the National Association of Variable Annuities (“NAVA”), the average investment management fees charged by a variable annuity are 0.82%, which is somewhat lower than the average stock mutual fund, and the Mortality & Expense (“M&E”) charges are roughly 1.15%. The net result is that the variable annuity costs roughly 2%, which is just 0.5 higher than the fees charged by the average mutual fund!

So, while the benefits offered by annuities do come at a cost, that cost is not significantly greater than the average cost of investing in mutual funds, and is paid in exchange for the valuable features offered by annuity contracts, such as tax-deferral, guaranteed minimum returns or return of principal. At its core, the annuity is primarily an income vehicle

for investors. Riders that can be selected to guarantee a minimum accumulation with principal protection, or to guarantee a minimum income benefit with a hedge against market volatility, or to guarantee a minimum withdrawal benefit to provide a predictable income stream for life, are not provided by mutual funds. Consequently, comparisons

between the two different financial products are usually like comparing an apple to an orange.

Note: Other expenses may apply. The preceeding example is for illustration purposes only and is not meant to be an exhaustive discussion of all fees and charges. Investors should consult specific product prospectuses before investing.

The Real Point…

The point we are trying to make is that if you’ve come to believe that “annuities are expensive” when compared with investing in mutual funds, you may adjust your thinking when you take a closer look at what today’s variable annuities actually cost. What is expensive to one person, after all, may not be considered so expensive to another, and the

benefi ts of investing through an annuity contract may be more than worth their only slightly higher cost.

What if the cost of a variable annuity contract, offered by a top-tier US insurance carrier, is 3.5%? And in exchange for that 3.5%, the investor is guaranteed that his or her tax-deferred account will never earn less than 7% simple interest annually.

Being a variable annuity, the investor may earn returns greater than the 7% minimum annual return through a successful investment strategy, but should the investments he or she made within the annuity decline by 5% in a given year, that contract will continue to pay the guaranteed minimum of 7% per annum. It’s downside protection, pure and simple. But, it costs 3.5% of the amount being invested. In addition, investors would receive a guaranteed future income that would last for as long as they live regardless of market performance. Investors would also receive a predictable income stream without relinquishing control over their investment.

So, the question is: Would you characterize that annuity as being “expensive”?

It costs 3.5% to have the downside protection of a 7% annual minimum return, in a tax-deferred account with access to self-directed stock market based investments. In the event that the markets decline significantly the years immediately before you are planning to retire, the impact won’t result in any changes to your plans.

Additionally, assuming that this hypothetical annuity contract is offered by one of the largest insurance companies on the planet, it can also accept deposits of qualified funds, meaning funds from a 401(k) rollover, for example. And, there are other benefits, as well, including a death benefit and ability to name a beneficiary. What does it cost? 3.5%. So, in our example, if you earn ten percent, it’s really only 6.5%, after the cost of the annuity has been deducted. Of course, if you lose 5%, you still earn 7%… a 12-point swing! But, it costs 3.5%.

Remember how you felt the last time a bear market affected your retirement savings? It would seem that, especially for those whose retirement is ten or fifteen years away, a little downside protection in a long-term, market-based, tax-deferred investment would be, in a phrase, just what the doctor ordered.

Expensive? Perhaps not so much after all.

So, why have many of us heard that annuities are “expensive,” and that we’d be better off investing directly in mutual funds? We believe there are several factors involved.

For one thing, once you invest through an annuity contract, your investment advisor no longer earns commissions by moving that money from fund to fund, or from stock to stock. And that makes annuities “the competition” for many in the brokerage industry.

Another factor has to do with where the baby boomers stand in relationship to retirement. With millions now seeing retirement less than twenty years out, and with the market bubbles that have created investor uncertainty, the security and other features available when investing through annuities has made them an investment whose time has come.

Not all annuities, it should go without saying, are created equal. Some offer features not available in others. Some have higher fees, some relatively lower. And there are dozens of different types and variations of annuities available. So it’s important to do your homework before you invest, and PRB Financial is prepared to help you every step of the way.

Variable products are subject to investment risk, including possible loss of principal. Before investing, carefully consider the investment objectives, risks, limitations, benefits, charges and expenses of the product and underlying investment options.

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Where will taxes be when you decide to retire from work? Today, we use a 40% figure to cover state and federal for those in the top tax bracket, but is it safe to assume that taxes won’t be much higher in the future? Not only is it not safe, but even attempting to forecast future US tax rates is nothing but a fool’s errand. See the chart of maximum tax rate history below:

INSERT CHART

1913 1918 1929 1941 1952 1963 1982 1988 1993 2006

100%

80%

60%

40%

20%

0%

Year

Source: U.S. Department of Treasury

Let’s take a look at the effect higher tax rates have on your retirement income calculations. Assume that you’ve determined that you’ll need at least $8,000 in monthly income to maintain your lifestyle during your retirement years. Using the 5% rule of thumb for annual withdrawals, you’ll need to have roughly $2 million saved the last day on the job. Add a cushion to absorb unplanned events and perhaps that number should be closer to $2.5 million.

Now let’s say that your assumptions for retirement are based on today’s current top tax rate of 35%, but the day you retire that top rate has increased to 45%. In a nutshell… you’ve got problems. The amount of spendable monthly income you were counting on has just decreased! Now if some unexpected expense presents itself, it can be very difficult to cover, since you are retired and working with a set amount of income.

Why do so many of us expend so much energy chasing a 2% higher ROI, when it is taxes that threaten our future financial security to a much greater degree? You can jump from fund to fund, from stock to stock, from bubble to bubble, and at the end of your working life, discover that all of your gyrations have been decimated by the policies of a new

administration in Washington DC. Why haven’t our investment advisers emphasized this point more strongly?

Investment advisors don’t dwell on the issue of how future tax rates will impact your nest egg because they simply don’t have many good answers to the problem. The companies that offer investment vehicles designed to provide a hedge against future taxes aren’t mutual fund companies, they’re insurance companies. And once you decide to put a

percentage of your wealth into an insurance company’s investment alternatives, that money starts being managed by that insurance company’s experts.

Does that mean that your financial advisor isn’t working in your best interests? No. Does it mean that he or she doesn’t always provide you with truly objective advice? Perhaps. You, of course, may have an investment advisor that you like and trust, but to the outside observer it would seem prudent, at the very minimum, that a few casual inquiries are in

order.

Insurance Companies… The Other Side of the Investment Coin

Insurance companies represent the other side of the savings and investment coin. Many people just think of insurance companies as providing life and other types of insurance, but in reality, that’s just one part of the total picture.

While insuring people and companies against risk is an insurance company’s primary purpose, they are also in the business of managing very large amounts of money over long periods of time. Today’s insurance companies are competing with everyone else in the over-crowded investment field for your business, and they now offer numerous policies and annuities of which every investor should be aware.

Insurance Company Solutions to Retirement Income Diversification

We all know the goal: Create a nest egg you can use to replace your paycheck. We also all know that we shouldn’t put all of our eggs in one basket… we learned it when we were kids, so we diversify our portfolios between different types of assets and accounts. And yet, today’s retirement plans all do the same thing. Roth IRAs and Roth 401(k) plans can

provide tax-free distribution in retirement, and municipal bonds offer tax-free income. But, distributions from other 401(k) plans, profit sharing, pension, deferred compensation, 403(b), 457, TSA, SEP, stock plan or IRA are ALL taxable. In other words, most people have all of their retirement savings in one taxable basket of nest eggs!

What most of us clearly do not know is that we should be diversifying the sources of our retirement income based on their tax consequences. Chances are that you already have several baskets that will produce taxable income in your retirement years. Doesn’t it make sense that you should also create a basket of money that you can access on a tax-free basis once you retire?

It does and everyone should. Period. Consider this:

Some percentage of everyone’s retirement savings should be in

a vehicle that will provide tax-free income after you retire, and

some percentage should be in a vehicle that offers protection

from downturns in the stock market.

Insurance companies have many options for providing retirement income that are unique to the insurance industry. Most notably, they offer vehicles through which income distributions can be received income tax-free.

That bears repeating: You can create a basket of retirement savings that will provide you with tax-free income in retirement by using certain types of policies offered by insurance companies, such as variable life insurance policies which provide permanent protection to your beneficiary upon your death. When you use these types of policies, policy values

can be accessed through withdrawals of principal and/or tax-free policy loans. And, the amount of annual income distributions can be adjusted for inflation. There are no penalties for withdrawal of principal you take before age 59 1⁄2 and all asset growth is tax-deferred. There is no guarantee of asset growth as there is investment risk. Withdrawals and loans will reduce policy value and death benefit. If excessive, they may cause the policy to lapse. A policyholder may need to make additional premium payments to prevent lapsation. If lapsed, policy distributions in excess of principal

are recharacterized as taxable distributions.

With these types of insurance vehicles, you direct your investments by choosing from the insurance carriers diversified menu of investment funds, known as sub-accounts, and they offer options like automatic rebalancing and dollar cost averaging. Also, you have the ability to move your investments between different funds without triggering taxes on the

gains. And, because insurance policies all allow for a beneficiary to be named, proceeds at death automatically avoid probate.

Conventional wisdom dictates that you should have a diversified portfolio of equities, bonds and cash that is adjusted based on how close you are to retirement age. But since taxes are the single biggest threat to the INCOME we’ll receive once retired, we all need to create a basket to hold a nest egg that will provide that income on a tax-free basis.

Few among us have the personality that can survive the long period of retirement with our monthly income subject to market volatility and tax increases. Few among us have a nest egg that will sustain us for life if we have to make withdrawals when our portfolios are down. And since there are numerous ways to generate guaranteed monthly income

for life, why don’t more of us turn to these solutions simply for the peace of mind gained from knowing that a portion of our retirement income will be guaranteed, and that we’ll receive a check each month for as long as we live? All guarantees are based on the claims paying ability of the issuing company.

Insurance companies today offer annuities that provide retirement income diversification solutions. Annuities, first and foremost, can provide guaranteed income for life. Shouldn’t a portion of your monthly retirement income be guaranteed for as long as you live?

With some annuities, you can design a guaranteed minimum withdrawal to protect your retirement income from downturns in the markets, while preserving your upside opportunity. You can select a guarantee of principal with potential for upside investment opportunity. You can even structure an annuity to provide an additional death benefit

for beneficiaries to guarantee a minimum rate of return on the dollars you invest.

What Price Retirement…

Do you want to roll the dice and bet that there will be no income tax increases during your retirement years? How comfortable will you be living with stock volatility and market risks throughout your retirement years? Most importantly, do you want to live the rest of your life under the constant threat of a pay cut that will change your

retirement plans because of a market correction or income tax increase?

Imagine the shock of having your monthly income cut after you’ve retired simply because income taxes went up. Forget about feeling left out of the next investment bubble. Imagine the feeling of being left out of your own comfortable retirement.

It’s never too late to change the way you think about what diversifying your retirement investments really means. And to realize that your comfortable retirement will come from answering just one question: How much will you get each month once your paychecks have stopped?

We succeed by working hard throughout our lives. We should all be avoiding future shock by designing retirement years that are less taxing.

Variable products are subject to investment risk, including possible loss of principal. Before investing, carefully consider the investment objectives, risks, limitations, benefits, charges and expenses of the product and underlying investment options.

PRB Financial’s Thought Leadership Series

If you’re under forty years old, chances are there’s no talking to you about investing

for your future. If you’re over forty, nearing 50 or looking at 65 as being just around

the corner, then it’s really important that you take a moment to take stock. No, not

buy stock, but take stock.

It can’t possibly come as a surprise, but your retirement years are approaching and they’re coming fast. If you don’t start to examine your views on investing for your future years, then what’s in store may come as quite a shock. To avoid that future shock, we need to better understand how we all got here, so we can change things going forward.

Understanding Bubbles…

We baby boomers have a love-hate relationship with bubbles. It all started in the last half of the 1980s, when “greed was good,” corporate raiders were modern day cowboys, and junk bonds meant that money was flowing through Wall Street like lava from Vesuvius.

Of course, much like what happened in Pompeii, it all soon came to a standstill. The market crash of 1987 signaled the end of an era. Drexel Burnham Lambert, Mike Milliken, Charlie Keating, Ivan Boseky, and the other names that had permeated our lexicon as being leaders of American business, all ended up to be major disappointments. The bubble popped, and it was a real mess.

Then, after weathering the storm of the early 1990s, we saw little Netscape go public, and soon everyone was doing it. We heard stories of business plans that had raised millions being written on napkins, our neighbors buying Cisco Systems at $6, and AOL buying media giant Time Warner. Never mind that Alan Greenspan was warning of irrational

exuberance and Warren Buffet was sitting on the sidelines. We didn’t want to be left out, so we jumped in with both feet.

Then the bubble popped again. American consumers lost $7.3 trillion as a result, and prayers rang out promising God that we would buy only bonds for life, if Cisco would just come back to $84 a share, if even for a moment.

By 2003 or 2004, however, that bubble’s demise was quickly being forgotten as real estate became our savior-du-jour. Now it would be our homes that would save us from ourselves. Someone that lost $250,000 betting on Amazon to reach $400, could still be assured a comfortable retirement simply by investing in a duplex, or whatever. Or why not… let’s buy two.

Now, with 2008 on our calendars, the real estate bubble has popped a few years back and many of us are about to begin the process of trying to get the gum out of our collective hair, if we haven’t already. And the crisis to come, as a result of the real estate bubble, has only just begun to affect our national psyche.

So, that’s three bubbles, and we’re three for three. What’s next? Are we waiting for yet another BIG OPPORTUNITY, through which we can finally catch up and retire in style? Or will we finally learn that we can’t afford another of those opportunities?

It is the view of most experts, and in fact it has become the common wisdom, that it is we investors that are the culprits. We, as the thinking goes, are our own worst enemy. It is simply human greed that causes the bubbles that cause us such financial harm. And therefore, we are doomed to repeat our past behaviors. But is this easily reached assumption really true? Are we really just greedy opportunists receiving our just desserts as the bubbles we’ve created inevitably are popped?

The answer is unequivocally “no”.

There’s no question that greed is an inherently human trait that we are all capable of exhibiting under certain circumstances. But, to assume that greed is what fuels our collective investor psyche, is simply a too cynical and easily reached conclusion. Consider, for example, that most of the people that saw their 401(k) balances decimated as a result of the markets of 2002 and 2003 were not being greedy when they jumped on the technology bandwagon of the time. Greedy people don’t leave 75% of their retirement investments in company stock. People jump on bandwagons because they don’t want to be “left out” of what everyone else is doing and from which many appear to be benefiting.

Being left out sucks. We hated it in elementary school and high school, and we don’t like it any more as we live our adult lives. No one wants to be the one still looking for an empty chair when the music comes to an abrupt stop. Being left out, like greed, is a basic human trait. But it is one much more common shared than that of greed. A few of us are

greedy, but none of us relishes the idea of being “left out”.

So, while to large degree, it is in fact “us” that provide the air that inflates our market’s bubbles, this effect is not being driven by our all-too-human greed. We are simply trying to ensure that we are not left out of a party to which so many of our peers appear to have been invited.

Human traits, such as self-preservation or greed are not things we can change… at best these traits can be momentarily controlled. However, we as human beings, will never like the feeling of being left out, and we never will—not even for a moment.

Left Out of a Financially Secure Future

During the technology bubble of the last half of the 1990s many of us were contemplating an early retirement as a result of our newfound investor prowess. Cab drivers had broker phone numbers programmed into their speed dial settings. Today, we’re not entirely sure that we will be able to retire at all, and few of us can remember the name of the broker we used in the late 90s, let alone come up with his or her phone number. Just try mentioning that you received a “tip” from a broker at an upcoming social gathering and you’ll quickly see how risk averse we’ve actually become.

Oh sure, we haven’t looked to be all that gun shy these last few years, but that’s only because we jumped into the real estate bubble that has recently lost its air. And make no mistake… our collective jumping into real estate was in fact driven by a need for at least the feeling or assumed relative safety of the real estate market. No one thought real estate could be risky because everyone was buying and it was easy to finance. Houses, after all, regardless of the price at which they are purchased, cannot end up being worth nothing, but shares in Pets.com offer no such assurance.

Change your view of what you don’t want to be left out of…

It’s time to let the law of nature that dictates that we don’t want to feel left out, work to our future advantage. We can learn from the past instead of allowing that human trait to draw us into repeating history by jumping into the next bubble du jour.

Let’s consider the event that, more than any other, we don’t want to be left out of: Our comfortable retirement. Imagine being left out of that. And, more importantly, its not so much an ‘event’, as it is that period in your life which can encompass as much as one-third of your lifespan. Kind of important, you think? Imagine watching your friends and

relatives vacationing together, while you remain at home constrained by a budget of far less money than you’re used to, or lived within while you were still employed.

Perfect. Now that you have the time to travel, you can’t afford to do so. Compare that with any feelings you may have

felt as a result of being left out of buying Cisco Systems at $6/share, and you’ll quickly realize that the feelings generated

by the two events don’t even come close. If the one is a pinprick, the other is an amputation of your arm.

Once you realize that the most important thing in life not to be left out of is your own comfortable retirement years, you

can begin to change your perspective on what you can and should be doing to make certain that doesn’t happen.

Savings and Returns on Investments

Of course, the first step is to save as much as you can, but for the purposes of this article, that’s the given. The next step is to invest those savings in order to, as any investment guy or gal will tell you, maximize the returns on investment or ROI that you receive while taking a level of risk you can handle.

We’re told that, if we are to reach our retirement savings goals, it is the long term performance of our chosen investments that reigns supreme. And it makes sense, on the surface anyway. Of course you should take steps to maximize your ROI, right? If you see one fund doing better than another, it stands to reason that you should put your money

where the returns are higher, assuming the risk of doing so is not significantly greater. Doesn’t it?

Diversification… Modern Portfolio Theory… It all comes down to what our parents taught us as children: Don’t put all your eggs in one basket. Diversify your investment holdings, that way if one investment goes south, the others will reduce the impact of the loss. These ideas also appear to make complete sense, but perhaps there’s more to the equation

than has been explained to us in the past. Maybe conventional wisdom should be questioned. Why should we accept losses at all?

Perhaps we have been misled over the years, and our understanding of what “investment diversification” and “ROI” really encompass is far from complete.

The Most Important Question to Answer…

When it comes to planning for your comfortable retirement, there’s really only one question to answer: How much money do you know that you will be able to receive each year after you stop getting a paycheck? That’s it. When discussing maintaining your lifestyle throughout your retirement years, no other calculation matters. Period.

What percentage withdrawal rate can my portfolio sustain this year? What if the market is down next year, will I have to reduce my income? Will I have enough money? Can I run out of money in retirement?

How much do you set aside? What percentage did a given fund return last year? Are the markets forecasted to go up or down? Who knows and why should you care? The question you have to focus on, if you don’t want to be left out of your comfortable retirement, is all about the cash flow your accumulated savings will provide during those years. And not just “maybe” but “for sure”.

There are lots of so-called experts that will offer to help you do the calculations (assumptions forecasted into the future) needed to determine both how much you’ll presumably spend and how much you’ll receive (assumed to be a level %) each year in retirement by determining what percentage of your nest egg you can withdraw each year without running out of money before you reach the end of your assumed life expectancy. Most will tell you that number is 4-5%.

That means if you have a nest egg of $1,000,000, the most it will produce in terms of annual income is $40,000 to $50,000… or less than $5,000 a month… and that’s before you pay the taxes on that income. That may be enough to stay out of the poor house, but probably not enough to cover the European cruise you’ve always dreamed of taking, or

absorb the added expense of a child unexpectedly returning to the nest not to mention the unexpected illness.

Although many of life’s surprises are fun and exciting, once you stop earning a paycheck you’ll find that many surprises that cost money in retirement are neither fun nor exciting. So, when you think about how much you’re going to want, need, and have in terms of monthly or annual income in your retirement years, it’s best to understand that something unexpected may come up and shatter your carefully prepared calculations (assumptions). Include a cushion in your numbers, in other words.

The New Diversification…

Even though we haven’t heard a lot about this in the past, diversifying doesn’t just apply to the asset classes in which you invest your money. A diversified portfolio isn’t merely one that balances the amounts held in stocks vs. bonds vs. international vs. whatever else, in relationship to your age and tolerance for risk.

The single biggest risk to your retirement income calculations isn’t the return on investment you earn as a result of diversifying among these options… it’s taxes. Some would tell you that you should expect your tax rates to be lower during your retirement

years, presumably because you’ll be earning less income. For the more successful retirees, however, tax rates won’t change at all because their income after they retire won’t decrease enough to place them in a lower income bracket.

Where will taxes be when you decide to retire from work? Today, we use a 40% figure to cover state and federal for those in the top tax bracket, but is it safe to assume that taxes won’t be much higher in the future? Not only is it not safe, but even attempting to forecast future US tax rates is nothing but a fool’s errand. See the chart of maximum tax rate history below:

INSERT CHART

1913 1918 1929 1941 1952 1963 1982 1988 1993 2006

100%

80%

60%

40%

20%

0%

Year

Source: U.S. Department of Treasury

Let’s take a look at the effect higher tax rates have on your retirement income calculations. Assume that you’ve determined that you’ll need at least $8,000 in monthly income to maintain your lifestyle during your retirement years. Using the 5% rule of thumb for annual withdrawals, you’ll need to have roughly $2 million saved the last day on the job. Add a cushion to absorb unplanned events and perhaps that number should be closer to $2.5 million.

Now let’s say that your assumptions for retirement are based on today’s current top tax rate of 35%, but the day you retire that top rate has increased to 45%. In a nutshell… you’ve got problems. The amount of spendable monthly income you were counting on has just decreased! Now if some unexpected expense presents itself, it can be very difficult to cover, since you are retired and working with a set amount of income.

Why do so many of us expend so much energy chasing a 2% higher ROI, when it is taxes that threaten our future financial security to a much greater degree? You can jump from fund to fund, from stock to stock, from bubble to bubble, and at the end of your working life, discover that all of your gyrations have been decimated by the policies of a new

administration in Washington DC. Why haven’t our investment advisers emphasized this point more strongly?

Investment advisors don’t dwell on the issue of how future tax rates will impact your nest egg because they simply don’t have many good answers to the problem. The companies that offer investment vehicles designed to provide a hedge against future taxes aren’t mutual fund companies, they’re insurance companies. And once you decide to put a

percentage of your wealth into an insurance company’s investment alternatives, that money starts being managed by that insurance company’s experts.

Does that mean that your financial advisor isn’t working in your best interests? No. Does it mean that he or she doesn’t always provide you with truly objective advice? Perhaps. You, of course, may have an investment advisor that you like and trust, but to the outside observer it would seem prudent, at the very minimum, that a few casual inquiries are in

order.

Insurance Companies… The Other Side of the Investment Coin

Insurance companies represent the other side of the savings and investment coin. Many people just think of insurance companies as providing life and other types of insurance, but in reality, that’s just one part of the total picture.

While insuring people and companies against risk is an insurance company’s primary purpose, they are also in the business of managing very large amounts of money over long periods of time. Today’s insurance companies are competing with everyone else in the over-crowded investment field for your business, and they now offer numerous policies and annuities of which every investor should be aware.

Insurance Company Solutions to Retirement Income Diversification

We all know the goal: Create a nest egg you can use to replace your paycheck. We also all know that we shouldn’t put all of our eggs in one basket… we learned it when we were kids, so we diversify our portfolios between different types of assets and accounts. And yet, today’s retirement plans all do the same thing. Roth IRAs and Roth 401(k) plans can

provide tax-free distribution in retirement, and municipal bonds offer tax-free income. But, distributions from other 401(k) plans, profit sharing, pension, deferred compensation, 403(b), 457, TSA, SEP, stock plan or IRA are ALL taxable. In other words, most people have all of their retirement savings in one taxable basket of nest eggs!

What most of us clearly do not know is that we should be diversifying the sources of our retirement income based on their tax consequences. Chances are that you already have several baskets that will produce taxable income in your retirement years. Doesn’t it make sense that you should also create a basket of money that you can access on a tax-free basis once you retire?

It does and everyone should. Period. Consider this:

Some percentage of everyone’s retirement savings should be in

a vehicle that will provide tax-free income after you retire, and

some percentage should be in a vehicle that offers protection

from downturns in the stock market.

Insurance companies have many options for providing retirement income that are unique to the insurance industry. Most notably, they offer vehicles through which income distributions can be received income tax-free.

That bears repeating: You can create a basket of retirement savings that will provide you with tax-free income in retirement by using certain types of policies offered by insurance companies, such as variable life insurance policies which provide permanent protection to your beneficiary upon your death. When you use these types of policies, policy values

can be accessed through withdrawals of principal and/or tax-free policy loans. And, the amount of annual income distributions can be adjusted for inflation. There are no penalties for withdrawal of principal you take before age 59 1⁄2 and all asset growth is tax-deferred. There is no guarantee of asset growth as there is investment risk. Withdrawals and loans will reduce policy value and death benefit. If excessive, they may cause the policy to lapse. A policyholder may need to make additional premium payments to prevent lapsation. If lapsed, policy distributions in excess of principal

are recharacterized as taxable distributions.

With these types of insurance vehicles, you direct your investments by choosing from the insurance carriers diversified menu of investment funds, known as sub-accounts, and they offer options like automatic rebalancing and dollar cost averaging. Also, you have the ability to move your investments between different funds without triggering taxes on the

gains. And, because insurance policies all allow for a beneficiary to be named, proceeds at death automatically avoid probate.

Conventional wisdom dictates that you should have a diversified portfolio of equities, bonds and cash that is adjusted based on how close you are to retirement age. But since taxes are the single biggest threat to the INCOME we’ll receive once retired, we all need to create a basket to hold a nest egg that will provide that income on a tax-free basis.

Few among us have the personality that can survive the long period of retirement with our monthly income subject to market volatility and tax increases. Few among us have a nest egg that will sustain us for life if we have to make withdrawals when our portfolios are down. And since there are numerous ways to generate guaranteed monthly income

for life, why don’t more of us turn to these solutions simply for the peace of mind gained from knowing that a portion of our retirement income will be guaranteed, and that we’ll receive a check each month for as long as we live? All guarantees are based on the claims paying ability of the issuing company.

Insurance companies today offer annuities that provide retirement income diversification solutions. Annuities, first and foremost, can provide guaranteed income for life. Shouldn’t a portion of your monthly retirement income be guaranteed for as long as you live?

With some annuities, you can design a guaranteed minimum withdrawal to protect your retirement income from downturns in the markets, while preserving your upside opportunity. You can select a guarantee of principal with potential for upside investment opportunity. You can even structure an annuity to provide an additional death benefit

for beneficiaries to guarantee a minimum rate of return on the dollars you invest.

What Price Retirement…

Do you want to roll the dice and bet that there will be no income tax increases during your retirement years? How comfortable will you be living with stock volatility and market risks throughout your retirement years? Most importantly, do you want to live the rest of your life under the constant threat of a pay cut that will change your

retirement plans because of a market correction or income tax increase?

Imagine the shock of having your monthly income cut after you’ve retired simply because income taxes went up. Forget about feeling left out of the next investment bubble. Imagine the feeling of being left out of your own comfortable retirement.

It’s never too late to change the way you think about what diversifying your retirement investments really means. And to realize that your comfortable retirement will come from answering just one question: How much will you get each month once your paychecks have stopped?

We succeed by working hard throughout our lives. We should all be avoiding future shock by designing retirement years that are less taxing.

Variable products are subject to investment risk, including possible loss of principal. Before investing, carefully consider the investment objectives, risks, limitations, benefits, charges and expenses of the product and underlying investment options.

You’re in your 60s or 70s.  You’re planning your estate, making decisions as to where you want your money to go after you’ve gone.  You’ve got $1 million in some type of qualified IRA that you don’t need to maintain your lifestyle, and you’d like to leave it to your loved ones.  But you’d also like to donate it to your favorite charity.  It would seem that someone has to lose out.  You can’t give your $1 million estate to your family AND give it to your favorite charity.  Can you?

Actually, perhaps you can.  Through an innovative new program offered, you may be able to accomplish both of these seemingly conflicting goals.

It’s referred to as the Charitable Living Estate Program and it’s a methodology that can allow an individual to donate money held in an Individual Retirement Account (IRA) to a charity, university, hospital, or religious organization, without depleting the amounts available in the person’s estate.  It also allows the individual to get funds from their IRA to their favorite charity immediately, without having to pay taxes on that money.

Oh, and it’s completely legal, as well.  The Charitable Living Estate Program or CLEP is based on recent rulings issued by the IRS and US Treasury, so in case you’re wondering why you’ve never heard of anything like it before, that’s why.

How it works:

Let’s say you’ve got $1 million in your tax-deferred IRA.  First, you roll it over into a self-directed IRA, which is not a taxable event.  Once in your self-directed IRA, you make a loan to your favorite charity, let’s say in the amount of $200,000, at the “fair market” rate of interest, and the charity signs a promissory note stating that the loan will be repaid to your IRA upon your death, and interest payments will be paid to your IRA annually.

The charity may use some or all of the funds to purchase a single premium permanent life insurance policy on your life.  The policy’s death benefit is $1.2 million.  The policy’s beneficiary is the charity, but there’s a clause called a “collateral assignment” that states that the loan is secured by and will be repaid from the policy’s death benefit proceeds.  The charity will receive whatever is left after the loan is repaid.

So, upon your death, the death benefit of $1.2 million is divided with $200,000 going back into your IRA to repay the loan, and $1 million going to the charity to use as it sees fit.  Presto!  Upon your death, your IRA has its original $1 million balance plus the interest payments received, which becomes part of your estate, and your favorite charity has received $1 million from you, as well.

You started with $1 million in your IRA, but through this innovative arrangement, you’ve donated $1 million to charity AND left your original $1 million to your heirs.

Of course, the loan requires you to charge interest, and the charity is responsible for making the interest payments each year.  If the fair market interest rate is 5%, then the charity’s annual interest payments are $10,000, and these payments can be handled one of three ways.

One way is to have the charity use some of the $200,000 they’ve received from the loan to make the annual interest payments.  Or, the charity can solicit donations from others to make the required payments.  The third choice, however, is often the preferable one.

In addition to making the $200,000 loan from your IRA, you sign a pledge stating that you will make future annual contributions of at least $10,000 to the charity.  You take the $10,000 out of your IRA and donate it to the charity without having to pay tax.  The charity uses the $10,000 to make the interest payments on the loan.  The $10,000 interest payment is paid back by the charity to your IRA account, and everyone’s even.

The CLEP allows individuals to give to charity without taking away from their heirs.  And, who wouldn’t be interested in giving to charity if it didn’t reduce the value of the person’s estate?”

The idea behind the CLEP isn’t actually all that new.  People have been using life insurance for a variety of estate planning needs, and the idea of using it to increase the size of one’s estate is as old as the estate tax itself.  Loaning money certainly isn’t new either.  But, when you put all of the elements together, the end result is quite remarkable.

There are a couple of caveats to creating a CLEP.  Most importantly, the individual must be in fairly good health in order to qualify for the insurance coverage.  If an individual’s health status is poor, it won’t work because they can’t be insured.  Another factor involves the charity; who must be a willing participant in the transaction.  On the surface, at least, this wouldn’t seem to present too much of an obstacle, but the point is that you just can’t go about setting up a CLEP on your own.

Lastly, but perhaps most importantly, the individual that sets up a CLEP must have the discretionary funds, meaning that the funds loaned from the IRA will not be needed again by the donor.  In other words, if you think you might need the funds that you’re loaning to the charity at some point down the road, they shouldn’t be included in your Charitable Living Estate Plan.

Setting Up Your Charitable Living Estate…

It may sound at least somewhat complicated, but in reality it is easy to establish your own Charitable Living Estate Program.  It does, however, require expertise, knowledge, the right partners and resources, and the ability to administer the program for years into the future.

The CLEP may not be right for everyone.  But, for those individuals, in fairly good health, that have sufficient excess funds in some type of qualified IRA that they want to donate to a charity or nonprofit organization, while protecting the value of their estates… the CLEP may just represent an ideal solution.

It should be noted that the CLEP does not change one’s tax position in any way.  The Pension Protection Act of 2006 already allows individuals age 70 1/2 to transfer funds to a charity without any income tax becoming due.  You don’t pay taxes on such transfers, nor do you receive a tax deduction.

With the CLEP arrangement, the primary differences are:

q  The money you transfer from your CLEP self-directed IRA to your favorite charity is “loaned” to that charity and therefore the funds will ultimately be repaid to your IRA upon your death.

q  The CLEP imposes no age restrictions on such transfers, so there’s no need to wait until you reach a certain age to get funds to your chosen charity or nonprofit organization.  Assuming you are age 59 1/2 or older, you can use the allowed transfers to provide the charity with the funds needed to pay your IRA the interest on the loan subject to appropriate IRS limits.

For the right individuals, the CLEP provides a way to get much needed funds to their favorite charity or nonprofit organization, without depleting the amounts that can be included in one’s estate.  In some ways, it’s like turning $1 into $2.  And, in this day and age, that’s not something anyone can afford to ignore.

And as if the gas prices, the housing slump, a declining dollar and a wobbly stock market, and the threat of inflation and/or recession weren’t enough, the impact of higher future tax rates could ultimately derail your retirement plans… unless you protect yourself.

It’s May and the Federal Government has just started sending out those “economic stimulus” checks we’ve all heard so much about. According to the White House, roughly 130 million Americans will qualify for the rebate, which will cost our country’s taxpayers more than $100 billion.

Will this $100 billion in rebates become the shot-in-the-arm that our teetering economy so badly needs? The debate rages on… and on… and on.

If, however, you’re among those that, as a result of your adjusted gross income exceeding $75,000 annually if you’re single, or $150,000 for a married couple, will not be receiving a rebate check this year, the most important question should not be whether the President’s plan will shore up our current insipid economic condition.

The more salient question on your over-achieving minds should be: Will the relatively low federal income tax and capital gains rates of today be higher in future years and if so, how much higher?

It’s no secret that Americans can have notoriously short memories. And, although it would certainly be understandable if you blocked this one out, as recently as 1980, the top federal income tax rate was (perhaps you should sit down) 70%, or roughly twice today’s top rate. Back in 1980, even if your annual income in today’s dollars was $100,000, you still got stuffed into a marginal rate of roughly 50%! Today, if you earn $100,000 a year, you pay 28%.

Then, there’s today’s long-term capital gains rate of 15% that we’ve all come to know and love. In 1980, that rate was 28%, again almost twice today’s rate.

So, where are we likely to go from here? It appears to be a case of the old adage in reverse: What goes down must eventually go up.

The tax cuts of the last few decades were supposed to stimulate our nation’s economic growth, a feat they most certainly accomplished and with flying colors, one might add. But, the cuts were also supposed to increase tax revenues to a level that would outpace government spending, and on that front either they, or more likely our politicians, failed miserably. In point of fact, were there not so much more to add to the picture, our deficit alone would create a need for higher taxes in our not-so-distant collective future.

But alas, there is so much more to add, and none of it good. Most notably, something like 80 million “baby boomers” are nearing retirement age. The oldest of this gargantuan group have already become eligible for Social Security; three years from now they’ll start receiving benefits under Medicare.

According to the National Center for Policy Analysis, if tax rates were to stay the same as they are today, by 2050 an incomprehensible 77% of all tax revenue would be used to meet the obligations of Social Security and Medicare alone.

You don’t have to have been a math major in college to realize that the remaining 23% would likely have a very difficult time paying for EVERYTHING else. You know, things like our nation’s defense, welfare, education, maintaining a2,000-mile fence along the Mexican border, support for the National Endowment for the Arts, Secret Service protection for Chelsea Clinton, and oh so much more.

This is clearly one of those subjects requiring no debate by economists or policy makers. Something’s simply gonna’ have to give, and cutting back spending on school lunch programs is not going to be enough. Heck, even if we eventually figure out how to calm things down in Iraq, Afghanistan, and country’s certain to be named later, we’re spending it so much faster than we’re making it that one of these days our nation’s credit card is going to be declined. (Who knows, maybe we can renegotiate the mortgage on The White House.)

Okay, so enough with the marginally funny material… our federal income tax and long-term capital gains rates will simply have to go up in the eminently foreseeable future. And that, my soon-to-be-retiring friends, has major implications for your retirement savings strategy.

Before we go on with what promises to be anything but uplifting insight, there are a few things that need to be straightened out. First of all, we’re talking about the future impact of higher taxes on relatively successful Americans. Not the idle rich, mind you. Regular hard-working professionals whose combined income of say $150,000 has allowed them to buy a house in a decent neighborhood, enjoy a nice vacation now and then, and perhaps send a couple of kids to a state-school.

Secondly, for anyone thinking that, since their income will be lower once retired, they won’t have to worry about higher taxes, well… you need to get your calculator out because you’re just plain wrong.

Let’s say, for example, that today you make $70,000 a year. That puts you into the 25% marginal tax rate of 2008. Once you retire, however, you figure you can get by with income of $55,000 a year, or roughly 80% of your pre-retirement income. But, if when you reached retirement age, we had returned to the tax rates of 1980, your $55,000 income would put you in the 34% bracket, some nine-percentage points higher than you would pay if you retired today. (And that number assumes that some portion of your retirement income comes in the form of a Social Security check and is therefore only partially taxed.)

The cold, hard, and sobering fact is that, assuming you make any significant amount of money today, get ready to be in a higher marginal tax rate after you’ve retired than when you were gainfully employed. And that, as they say, is the rub.

For the last thirty years, give or take, we’ve all been told something entirely different. We’ve all been told that we should save and invest on a tax-deferred basis above all else. In a tax-deferred investment vehicle, such as the ubiquitous 401(k) plan, we contribute as much as we’re allowed to contribute, and we do so on a pre-tax basis. Contribute $1, the thinking has gone, and that entire dollar goes to work earning returns, as opposed to whatever amount would have been left after the taxes were paid.

It seemed like pretty solid thinking at the time. Of course, then the market crashed in 1987, we slipped into recession in 1991-92, we held when we shouldn’t, bought high and sold low, and then invested in the hallmarks of what was to be a “new economy,” such as Pets.com and e-Toys.

While it’s true that as participants we enjoy pre-tax and tax-deferred advantages, those seem to be about the only advantages to be had from Our 401(k) plans. Our strategy has been to contribute as much as we can each year, and then hope like all get-out that we don’t lose too much in the years before we’re planning to retire.

Based on what’s been said, however, our 401(k) plan accumulated wealth faces an even greater threat than that presented by market downturns: higher tax rates. After all, you can to large degree insulate yourself from significant downturns in the stock market by diversifying properly in relationship to your age and your ability to tolerate risk. But there’s no portfolio diversification strategy that will protect you from Uncle Sam standing at your door with his hand out.

Or is there?

Perhaps the most obvious response to the threat of higher federal income tax rates in future years is to, when possible, pay the tax now rather than later. The Roth IRA comes to mind, as do various life insurance based investments.

In a Roth IRA or Roth 401(k), contributions are made with after-tax dollars, so you pay the taxes now, presumably at today’s historically lower rates, but the future income generated, as a result of monies invested within either type of Roth, are withdrawn tax-free by the plan participant.

The Roth IRA, which allows a contribution of $5,000 in 2008 ($6,000 for those age fi fty plus), is only available to couples, fi ling jointly, whose combined annual income does not exceed $169,000; single’s cap out at $116,000. Conversely, the Roth 401(k) imposes no restrictions based on income, so you can contribute regardless of how much you make a year. But, it does impose a limit on the amount of you may contribute annually. In 2008, that limit is $15,500 ($20,000 at age fifty plus).

So, both Roth plans require the investment of after-tax dollars, but again, your investment gains and future withdrawals are tax-free. The real problem is that if you and your spouse’s combined annual income is more than $169,000 a year, or $116,000 a year if you’re single, you’re out of luck at least as far as the Roth IRA is concerned.

You can participate in a Roth 401(k), assuming of course that the plan is available where you work. But, with annual contribution limits that essentially mirror those imposed by the traditional 401(k) plan, those in the highly compensated group may see only incremental value.

There are, in fact, various vehicles that investors might use to provide a hedge against the threat of higher taxes in future years, but you won’t find them on Wall Street. For example, Variable Universal Life (“VUL”) insurance contracts offer policyholders access to stock market based investments, the ability to create a future source of tax-free retirement income, and valuable life insurance protection that can often be made available on a guaranteed issue basis.

Certain annuities can also play a role in your tax-advantaged future. Variable annuities earn stock market based returns. Indexed annuities offer returns tied to a specific index, such as the S&P 500. And, fi xed annuities provide returns based on a fixed interest rate offered by the insurance carrier.

Many of today’s annuities can be structured to provide guaranteed minimum annual returns that protect investors from downturns in the markets. Such annuity products often allow investors to schedule systematic withdrawals that cannot be outlived by both you and your spouse.

As a broad strokes example, a variable annuity that guarantees a minimum annual compound return of 7.2% is guaranteed to double by its tenth year. Then the investor could arrange to receive systematic withdrawals of five percent each year for life.

Let’s say that you were to rollover $1 million from your 401(k) to a qualified annuity with these assurances. In ten years, your balance in your hypothetical annuity is guaranteed to have doubled to $2 million, and your resulting lifetime income, using the 5% allowable rate for systematic withdrawals, would be $100,000 a year.

The bottom-line is, investors that use some combination of VUL and appropriate annuity product(s) can create, among other things, a powerful hedge against the threats of higher future tax rates, and a guaranteed income stream that cannot be outlived.

Still, some argue that annuities and VULs are “expensive,” imposing costs and fees that make them something less than a good deal for most investors. The facts, however, may say otherwise. Although no commentary could be applied to every annuity in the marketplace, according to the Securities and Exchange Commission Website, the average investment management fee of an annuity today is slightly less than what is charged for investment management by the average mutual fund.

However, there is no question that both annuities and insurance products do impose certain fees, taxes, and other costs associated with the purchase of life insurance. Both vehicles can also offer investors a myriad of advantages, including the ability to create a tax-free retirement income stream, and protect oneself from significant downturns in the markets.

In Conclusion…

In truth, no one can know where our Federal income tax rates will be in future years. And it’s certainly conceivable that our tax rates will not go up in the years to come. But why expose 100% of your nest egg to the chance that they will? By expanding your definition of “diversification” and putting some of your savings into Roths, if available, and/or other tax-advantaged insurance and annuity products, you’ll remove some of the risk to your future comfortable retirement.

All of this being said, clearly retirement is no time for financial surprises that reduce our annual income. Just imagine how you’d feel should the future bring a 70% top income tax rate, after calculating your retirement income needs using today’s 35% top tax bracket. No fun.

Through the use of the various vehicles offered by today’s insurance companies, you can protect, to large degree, your future income from the threats of higher taxes and/or underperforming markets. Or you can continue to hope against all hope that Social Security will be miraculously saved, the “War on Terror” will very soon come to a peaceful end, and G.W. Bush will somehow remain our President for the next twenty-odd years.

Could happen.

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