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FINANCIAL SECURITY IN AN INSECURE WORLD Presented to : Main Line Assoc. for Continuing Education June 21, 2012 Presented by : Christopher J. Hackley, CFP, ChFC, CLU Robert P. Wermuth, ChFC, CLU Michael W. Mills, CFP, CPA, JD, LLM.

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slide1

FINANCIAL SECURITY

IN AN INSECURE WORLD

Presented to:

Main Line Assoc. for Continuing Education

June 21, 2012

Presented by:

Christopher J. Hackley, CFP, ChFC, CLU

Robert P. Wermuth, ChFC, CLU

Michael W. Mills, CFP, CPA, JD, LLM

DOFU 5/2011 TN 327825. Securities and investment advisory services offered through Securian Financial Services, Inc., Member FINRA/SIPC. Legacy Planning Partners is independently owned and operated. This presentation is for internal use only, it is not to be used with the general public.

our world has changed
Our World has Changed

Clients already struggle with what may be the most defining aspect of the “new normal” – a prevailing sense of uncertainty regarding every aspect of the economy and finance

~Scott Leibs, “from the editor”

CFO Magazine April 2011

why the world has changed
Why the World has Changed…

Many have Lost Faith in:

  • Government
  • Corporations
  • “Pillars of Society”
  • “Nuclear” Family

…How can they gain confidence?

…Who can they trust?

the world has changed and is changing faster then ever before
The World has Changed……and is changing faster then ever before

We are facing increased complexity & volatility:

  • Paradox of Globalization
  • Frequency & Severity of “Black Swan Events”
  • Technology’s / Internet’s Impact
  • Impact of Mass Media (Mass Hysteria)

…People need a NEW strategy.

slide6

*We Need to Educate Clients on the Types of Risks *We Need to Empower Our Clients to be Financially Resilient Using All the Tools at Our Disposal

  • As Financial Professionals…

With proper Integration and Implementation, we increase Resiliency.

slide7

Pray for potatoes with a hoe in your hand.

~Old Irish Proverb

Nick Murray May 2011

financial planning increases resiliency
Financial Planning Increases Resiliency

Let’s look at the risks embedded in each quadrant.

Risk Management & Protection Planning

Asset Management &

Ret. Income Planning

Debt Management & Cash Flow Planning

Estate Planning & Business Succession

categories of financial risks
Categories of Financial Risks
  • Tax Risks
  • Portfolio Risks
  • Human Risks
tax risks
Tax Risks
  • Income Tax
  • Payroll Tax
  • Capital Gains Tax
  • Property Tax
  • Gift and Estate Transfer Tax
portfolio risks
Portfolio Risks
  • Market Risk
  • Security Concentration Risk
  • Sequence of Return Risk
  • Liquidity Risk
  • Inflation Risk - Rising Interest Rates
  • Deflation Risk - Falling Interest Rates
  • Credit Risk
  • Currency Risk
  • Legislative Risk
human risks
Human Risks
  • Mortality Risk
  • Morbidity Risk
  • Longevity Risk
  • Psychology and Behavioral Finance Risk
  • “Entitlement” Risk
  • Divorce
  • DUI and Other Malfeasance
  • Property and Casualty
continually educate clients through the planning process
Continually Educate Clients through the Planning Process:
  • It is incredibly important to be crystal clear about the Purpose behind every investment position and strategy that you recommend
  • You must explain what Specific Risk each position and solution is addressing
resiliency techniques
Resiliency Techniques

1) Debt Management & Cash Flow Planning:

  • Income & Asset to Liability Ratios
    • Increase them!
  • Liquidity Risk:
    • Buy 30 year mortgage, make payments over 15 years
    • Fixed Mortgage along with Equity Line
  • Deflation Risk:
    • Debt elimination
    • Variable interest rate
  • Interest Rate Risk:
    • Fixed or Variable discussion
  • Inflation Risk:
    • Fixed interest rate
resiliency techniques1
Resiliency Techniques:

2) Risk Management & Protection Planning:

  • Liquidity Risk: Insurance Solution & “Cash” Reserves
  • Tax Risk: Permanent Life Insurance Products, Qualified Plans
  • Mortality Risk: Life Insurance Product
  • Longevity Risk: Insurance Product; Annuity
  • Morbidity Risk: Disability; Long-Term-Care Insurance
  • Sequence of Returns Risk: Annuity and Cash Reserves
resiliency techniques2
Resiliency Techniques

3) Asset Management & Ret. Income Planning

  • Liquidity Risk: 3-6 mos. liquidity reserves; money mkt.; cash reserves
  • Interest Rate Risk: Shorten Maturities
  • Credit Risk: Increase Quality & Diversification
  • Inflation Risk: Equities; Hard Assets
  • Currency Risk: Non-Monetary Denominated Assets
  • Security Specific Risk: Diversification/Sale Strategy
  • Market Risk: Diversify; Increase Reserves
  • Tax Risk: Roth, Muni Bonds, Tax-Loss Harvesting, Qualified Plans
  • Investor Behavior: Education, Trusted Advisor
  • Deflation Risk: Annuities; Guaranteed Income Sources
resiliency techniques3
Resiliency Techniques

4) Personal Estate Planning & Business Succession :

  • Disclaimer Style Wills
  • Properly Funded Buy/Sell Agreement
    • Death/ Disability…Divorce, Done?
  • Contingent Beneficiaries/Trustees/Guardians
  • Liquidity Risk
    • Federal & State Estate Taxation, Probate, Capital Gains Tax*
  • Wealth Transfer Risk

* This information should not be considered as specific tax/legal advice. Clients should consult their tax/legal advisor regarding their own specific tax/legal situation

slide18

Retirement planning demands obsessive scrutiny of risk. If we fail at this point, we can ruin lives. Clients must be better educated about the known and possible risks they face in their retirement portfolios.

~Rick Adkins, CFP®, ChFC, CLU

“What I’ve Come to Believe about Retirement Planning”

Journal of Financial Planning, July 2010

market human and tax risks
MARKET, HUMAN AND TAX RISKS:

Deflation & Recession

Downside Market Volatility

Return Sequence Risk

High Inflation

Upside Market Volatility

Participation / Opportunity Risk

Market:

Normal Market Performance & Volatility

Die too Soon

Become Disabled

Human:

Live too Long

Normal Life Expectancy & Morbidity

Tax:

High Tax Rates

Low Tax Rates

Periods of Moderate Taxation

retirement income planning build it with the end in mind
Retirement Income Planning: “Build it with the end in mind!”

*

Risk Scenarios:

Risk Scenarios:

Risk Scenarios:

  • Periods of Unusually poor Market Performance and Deflation
    • -Market Risk
  • Premature Death or morbidity issues/LTC
  • Periods of unusually High Taxation.
  • “Normal” Financial Market Performance and Volatility
  • “Normal” Life Expectancy and morbidity experience.
  • Periods of Moderate Taxation
  • Periods of unusually High Inflationand Volatility.
  • -“Return Sequence” Risk
  • Considerably outliving normal Mortality.
  • Periods of unusually Low Taxation

Solution Alternative:

Solution Alternative:

Solution Alternative:

  • Traditional sources of retirement income; pensions, S.S., Treasury bonds, CDs, Dividends
  • Fixed Annuity Contracts
  • Life Ins. & L.T.C. Benefits and features
  • (Including guaranteed income options)
  • A variable annuity contract with living
  • benefits riders to provide guaranteed
  • inflation-adjusted income.
  • A variable annuity contract with living
  • benefits riders to provide guaranteed
  • lifetime income without annuitization

**

  • Traditional asset allocation models with disciplined rebalancing capabilities
  • Term Life Insurance Protection
retirement income planning build it with the end in mind disclosures
Retirement Income Planning: “Build it with the end in mind!”Disclosures

*The previous graphics are for illustrative purposes only. It is not indicative of any particular investment or guarantee of future performance. Neither diversification not asset allocation guarantee against loss, they are methods used to manage risk.

**Riders are available at an additional cost and subject to restrictions including limitations as to annual withdrawal amounts, periods which the rider may not be cancelled, and investment limitations.

phases of retirement
Phases of Retirement

Why we need to keep it Flexible!

SATURDAYS

SUNDAYS

  • Honeymoon Phase:
  • Travel
  • Hobbies
  • “Academic Indulgences”
  • Charitable/Give-Back Initiatives
  • Often need additional income to fund expensive pursuits.
  • Veteran Retiree Phase:
  • Spiritual
  • Family
  • Rest
  • Often looking for simplicity and consistency in routines

MONDAYS

FRIDAYS

  • Fight for Independence and Dignity Phase:
  • Often facing complexities of Long Term Care, nursing home, and end of life issues.
  • Early/Pre-Retirement:
  • Often still working Either Part-time or Flex-Time
slide23

But it brings to my mind the H.L. Menken quote, “For every complex problem there is an answer that is clear, simple and wrong.”

~Rick Adkins, CFP®, ChFC, CLU

“What I’ve Come to Believe about Retirement Planning”

Journal of Financial Planning, July 2010

benefits of integrating resiliency techniques
Benefits of Integrating Resiliency Techniques
  • Efficiency
    • True cost
  • Allocate dollars to solutions that:
    • Serve more than one purpose
    • Address more than one risk
    • Add benefit throughout life stages
  • Flexibility
retirement income v wealth transfer
Retirement Income v.Wealth Transfer
  • Two sides of the same coin
  • Wealth Transfer Emotions / Risks
    • Risk of giving away more than client can afford
    • Risk of negative impact on children or other recipients (“entitlement”)
    • Risk of changes in the law
  • Managing the risks
federal estate tax
Federal Estate Tax

Exceptions

  • Unlimited Marital Deduction
  • Charitable Gifts

Value of bequest

  • FMV as of date of death (step-up in basis)

Must pay tax within 9 months

  • Look for liquidity

Portability

  • Transfer unused exemption on death but only to surviving spouse
federal gift tax
Federal Gift Tax

Exceptions

  • Annual exclusion gifts
      • $13,000 (2012) per person, per year
      • Must be a present interest
  • Unlimited Marital Deduction
  • Medical and Education expenses
  • Tax Payments relative to Intentionally Defective Grantor Trusts

Value at gift

  • Donor’s basis
glimpse of the future
Glimpse of the Future

Republican View – Eliminate Estate Tax

Democratic View - Sensible Estate Tax Act of 2011

Obama Administration View – Budget Proposal for 2013

asset segmentation by purpose determining core capital
Asset Segmentation by Purpose:Determining “Core Capital”

“Core Capital”

Examples:

Vacation Home – Good for Personal Use and Wealth Transfer, but provides no Financial Security

Life Insurance – Good for Wealth Transfer and Financial Security, but has no Personal Use

slide37
Financial Advisors do not provide specific tax/legal advice. This information should not be considered as specific tax/legal advice. You should consult your tax/legal advisor regarding your own specific tax/legal situation.

Securities and investment advisory services offered through Securian Financial Services, Inc., Member FINRA/SIPC. Legacy Planning Partners is independently owned and operated.

Separate from the financial plan and an advisors’ role as financial planner, an advisor may recommend the purchase of specific investment or insurance products or accounts. These product recommendations are not part of the financial plan and clients are under no obligation to follow them.