crash proof portfolio

Crash ProofPortfolio

Take The Fear Out OfInvesting

Eric G. Edwards

Published by FastPencil

Copyright 2014 Eric G. Edwards

Published by FastPencil307 Orchard City DriveSuite 210Campbell CA 95008 [email protected](408) 540-7571(408) 540-7572 (Fax)http://www.fastpencil.com

No part of this book is investment advice. This book contains con-cepts.For investment, retirement and insurance planning advice alwaysconsult a professional. If you desire advice and complex planning youmay contact Mr. Edwards.

No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form, or by any means, electronic,mechanical, photocopying, recording, or otherwise, without the priorconsent of the publisher.

The Publisher makes no representations or warranties with respect tothe accuracy or completeness of the contents of this book and specifi-cally disclaim any implied warranties of merchantability or fitness fora particular purpose. Neither the publisher nor author shall be liablefor any loss of profit or any commercial damages.

Printed in the United States of America.

First Edition

This book is dedicated to God. Every blessing in our lives flows fromthe throne of our creator. He is sovereign. This is why our company

name is Sovereign Asset Management. This book is also dedicated tomy father Greg Edwards, who passed away in 1995, my mother

who had to raise two teens, after losing her soul mate to braincancer, Rick Wallace who mentored me, my children Samuel, Ericaand Kadence, and last but never least my wife Lauren who has been

my advocate and best friend for the last 6 years.

Acknowledgments

I would like to thank all of the clients who have placed theirtrust in me over the years. I would also like to thank my formermentors Robert Goldsmith and Rick Wallace.

ContentsChapter 1 The Street Mentality ............................................ 1Chapter 2 Whats My Why? .................................................. 7Chapter 3 The Game Is Rigged ........................................... 13Chapter 4 Even Steven ....................................................... 21Chapter 5 Whats an a nudity dad? ...................................... 29Chapter 6 Hybrid Retirement Plan ..................................... 37

Indexed Annuity vs. The S&P 500 Example ......... 41Chapter 7 Who cares about 1% ........................................... 45Chapter 8 Never Ending Income ........................................ 49Chapter 9 Dont Despair Over Long Term Care .................. 55Chapter 10 Death With Benefits ........................................... 59Chapter 11 Stretch that IRA all day ....................................... 63Chapter 12 Become Heir to a Fortune ................................... 67Chapter 13 Create A Tax Free Estate .................................... 73Chapter 14 Why A Trust Is A Must ....................................... 81Chapter 15 The Best Annuity For Last .................................. 87Chapter 16 Gold, Guns, God ................................................ 93

Conclusion ........................................................ 97

1The Street Mentality

Wall Street is the ONLY place on earth where millionaires drive up in a Rolls Royce to take advice

from some kid who took the subway to get there.Warren Buffet

1

Note: This book contains blank pages at the end of somethe chapters. Its not an accident. The point is for you towrite down questions, thoughts, and notes.

Thank you for reading. Please pour a cup of Joe for your-self and enjoy.

Excuse my blunt manner of speaking, but its about timesomeone told you the truth. The Wolves On Wall Street are outin force. Youve probably seen the movie about the greedyyoung stockbroker, who thinks his clients money is better spentby him. The sad truth is thats a pretty realistic picture of manystockbrokers. I am not saying every stockbroker is a criminal.The fact is most operate legally. Its the mentality Im talkingabout.

Do you recall the scene where Leonardo DiCaprio is eating

lunch with Matthew Mcconaughey? Leo says something abouthow wonderful the clients are. What Matthew Mcconaugheysays in reply is shocking. Its offensive. It made me want tothrow up when I watched the movie. I almost turned it off.

Excuse my French , but he says, F the clients. He then says, The name of the game is to move the money

from your clients pocket to your pocket. He informs the youngJordan Belfort played by DiCaprio that you never want your cli-

2 Crash Proof Portfolio

ents to actually sell and walk away with real money. Keep themaddicted. Do you get what he was saying?

He is saying the goal of a stockbroker is to make YOU broker

(excuse the improper English) and himself richer. He tells theyoung broker that you will always have another bright-idea,when the client wants to sell. Its smoke and mirrors. The men-tality is, never let your clients gains become real. Always rein-vest. Keep them at the table. Always have another bright idea, avery special idea.

Does that sound familiar? Its a lot like the card dealer who

gets you to keep playing-at the card table. Stay long enough andthe house wins. Stockbrokers, for the most part, have no idea ifthe market is going- up or down. To take another quote fromthis movie, Nobody knows which direction the market is goingnot Jimmy Buffet or Warren Buffet.I disagree Warren hasenough money to make the market move, nevertheless, its agreat point.

Stockbrokers often read some article in the Wall Street

Journal, select a few key phrases from it and sound like theyknow what theyre talking about. They dont. They dont knowanymore than most of their clients except the lingo. We have aterm for that in Texas; its called BULL.

The Street Mentality 3

Wall Street has a ton of tricks up their sleeves. One infamousone is called the paper loss. There is a book I often give topotential clients titled Stress Free Retirement , that addressesthis issue. I think this issue needs to be addressed by as manypeople as possible until we eliminate the term paper loss. Whenyou are up and making money does your broker call you and sayits just a paper gain? Heck no! Why not?

Do they say we need to sell now to make your paper gain real?

Not unless they need to sell you something else! If, however, themarket is down, and youre losing money faster than BarrackObama tells lies they say, Its just a paper loss. Its not real. Itsa lot like the casino with all those poker chips. If, instead ofpoker chips, you had actual dollars on the table, chances are cau-tion would abound. Its not real money until you cash in.

The fact is, though, it is real money. It just looks like cheap

plastic chips. I think the same applies with our debit cards. I betif we all carried cash around, we would spend less. Its genius.The bad thing is, its genius in a way that hurts you. Your debitcard doesnt feel like money. Your account balance doesntshow when you use your debit card. When you check your bal-


ance online or at the bank you say Where did all my moneygo? The same applies with a paper loss. The out of sight out ofmind mentality is what Wall Street is using to keep you in thedark. Wall Street is full of crooks. Its time to call a loss a loss.

When you have a paper loss of say $25,000, thats a new car

you could buy. Those were a few great vacations you could havegone on. Life comes down to two things, memories and themoney it takes to make memories. When your broker tells you,its a paper loss, the chance to make those memories just wentright down memory lane.

The very term paper loss is insane. The dollars in my wallet

are paper. The checks you have to cash at the bank are paper.Its a paper loss. I guess thats accurate. Its your money.

Wall Street has another trick of misinformation called buy

and hold. I wont go into great detail here, but the idea that youshould hold investments that are losing money is counter tocommon sense. Smart investors have a set of rules, a system theyuse when making decisions. They dont just buy and holdbecause their Edward Jones guy said so.

YOU need to be educated. You need to be informed. You

dont need to be SOLD or TOLD what to do. You need to make

The Street Mentality 5

smart choices. The idea behind this book is to help you do justthat.


2Whats My Why?

When I was in first grade, at the tender age of seven, I gotsome devastating news. I found out my dad had brain cancer.He had brain tumors. One was the size of a grapefruit. He wasgiven two months to live. Ill never forget walking in the hos-pital room and hearing that news. I started bawling.

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My dad, who was a huge fan of The Three Stooges, startingacting like Mo (his favorite) and making me laugh. The otherdefining characteristic of my dad, other than his sense of humor,was his resilient Christian faith. A few minutes later when thedoctors came back into the room they said they were sendinghim home and told him to get comfortable. I watched my fathertell the doctors I will live and not die. I will declare the works ofThe Lord. My God will heal me. The doctors didnt mock him,but they certainly didnt agree. A few weeks later while at churchmy dad announced to the church that he had brain cancer. Thepastor, whose name was Jimmy Hester, asked my father how hefelt about the diagnosis. My dad replied, Instead of saying Godwhy me? I say God try me. That is an amazing reaction to beingdiagnosed with a terminal illness. I dont know that I couldstand so strong.

Dr. James Bland was his doctor. A few months went by and

dad was still alive and doing fine. He attended a tent revival andwas prayed for by the famous evangelist R. W. Schambach.

That night my father had a dream of being attacked by a black

panther. In the dream, he broke its neck. A few days later, hetold his doctors to run another MRI scan. They reluctantlyagreed. His cancer was gone. The doctors said all they could seewas scar tissue from where the tumors had been. I still havecopies of the MRI scans. It was, and still is, a verifiable miracle.

Dr. James Bland became a Christian. To Dr. Bland, what he

saw happen with my father proved his faith in God was real. Iwish the story ended here, but it doesnt.


I had my dad until I was 15 years old. The brain cancer cameback 7 years after his miracle. He died April 13th, 1995. I wastorn apart by his death. I always thought God would heal himagain. God chose to take him home to be with Him. I had 7additional years with him that doctors say shouldnt have been.

A couple of weeks later, a man named Rick Wallace came to

our house. He sat at the kitchen table with my mother and me.He was a friend to my father. He was also something else. Hewas his life insurance agent and financial planner. Rick pulledout a check addressed to my mother for $150,000. He helpedher create a plan to make the money last. At that moment, I real-ized what I wanted to do for my career.

I asked Rick to hire me. Rick told me, I cant hire you son.

When you turn 18 years old, give me a call. I bet old Rick didntexpect me to follow through. The day I turned 18 years old, Iput on the only suit I owned and called him. He invited me tocome to a training event he was holding one Saturday morning.He hired me. I worked under Rick as a non licensed marketingperson for about a year, just learning the business. I was 120 lbs.soaking wet. I looked 15 and was studying for my insurancelicense. For nearly a year, Rick went with me on every appoint-ment I set. I didnt have the confidence looking like a highschool student to give people financial advice. This man whoseincome was close to $400,000 a year took me under his wingand mentored me personally. I will forever be grateful to RickWallace and the Wallace family. A year later I passed my Series 6and Series 63 tests.

Whats My Why? 9

I felt on top of the world. Ill never forget I scored a 91 on atest most people have to take several times before they pass. Thejoke around the office was I studied more than I sold. I think, toa degree, this is still true. Something in me wont let me sell any-thing to a client before I really diagnose and study their situa-tion. I think starting out and having to prove myself has led tome making sure I know my stuff so well. I make mistakes. We alldo. I just try to make very few. I try my best to give the very bestplan in the world to every client I have.

The impact of losing my father and someone actually helping

me changed me. Thats my why. Thats why I do this. Thatswhy I love this business. Thats why when I sit across thekitchen table from a client, I know exactly why I am there. Toplan their financial future and to make sure the future is stillbright for their families in case one night they dont comehome.

I dont work for Rick anymore. Rick and I are still good

friends. I have since opened my own practice. Rick sells term lifeinsurance and mutual funds. He is great at what he does. My cli-ents need more safety than mutual funds can provide. I look atevery client as if my father were still alive. If the client is awoman, I look at her situation as if I was making a plan for mymother. I look at their children and grandchildren as if theywere my own. Why? Because Ive been at the kitchen table whenour financial planner was the saving grace for my family. Manybusinesses and sales people pay lip service to the idea that cli-ents are like family. I dont. I cant. This business is very personalfor me.


I recently joined forces with the National Ethics Association

because they require a higher level of transparency. They have acode of ethics that every member must abide by. Integrity, hon-esty, trust and transparency are a rarity in this line of work.Thats a shame. My why is to change that. I, however, amproud to call myself a Wealth Manager, Insurance Salesman,Annuity Salesman, Trusted Advisor etc.

I love this business, and I love my clients. Thats my why.

What is your stockbrokers why? Is it to move your money everyfew months? Is it to hit a personal income goal? Is it becausethey like the title and prestige of being a financial advisor? Whyis he or she motivated to plan for you? I hope its because theycare about you. I hope they put your needs above their own.Thats the only way to do this business. Thats how you last. Iam in this business to provide incredible service. I get paid wellto do so.

What is success? Success is having clients who have been with

you for over a decade. Success is bringing a check to a widowshome when she just lost her husband. Success is knowing thisbook will change financial destinies. Success is being invited toclients homes for dinner and being welcome during the holi-days. Success is being the only sales person allowed in a clientshome. I have made a lot of money at times in this business, butsuccess isnt just monetary. Success is being able to look themirror and say I like that guy. Success is being able to sleepwell at night because you told the truth even when it was tough.I sometimes feel like an old cowboy who is out to correct an

Whats My Why? 11

injustice sometimes. Too many people have been lied to bypeople in my profession. It makes my blood boil. My why is tochange that. My why is to reach the peaks of success withoutcompromise.

Enough about me. Whats your why? What drives you?

What does money really mean to you? What do you want in afinancial advisor? Whats your legacy? I ask because if I knowyour why, and you know mine, we can create the how. Thatsthe easy part.


3The Game Is Rigged

If you are asking about too big to fail and can what hap-

pened in 2008 could it happen again, the answer is yes, itabsolutely can happen again. If anything, too big to fail is abigger problem because the biggest financial institutionsare more concentrated today than they were. Dodd Frank

did not solve too big to fail.FORMER CEO OF MERRILL LYNCH

JOHN THAIN Your stockbroker doesnt know which direction the market is

going. A stockbroker can make a guess, and 50% of the timethey might be right. Its a rigged game of the richest of the richgetting richer. Before $500,000 software made most of thetrades, you had a chance. Its called High-Frequency Trading.Before almost all of the activity in the market was driven by largeinstitutional investors, you had a chance. Now in 2014 there are

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a small group of ultra wealthy players who can cause the marketto implode or rise. How is that possible? Well, the market issupply and demand, and 90% of the worlds wealth is controlledby 1% of the population. That 1% of the population decideswhen the market will crash or rise. The key is to make sure youdont have any idea. Thats not a difficult task when that 1% ofthe population also controls the media. If they want people todump their money into the market, the news will say the marketis growing. If they want a massive sell off, the news will cover ascary story about the economy. You can take advantage of this,if you want to spend hours upon hours learning to day trade. Inaddition to this, you will most likely be wrong more than youreright at first. Chances are, you dont have that kind of time.People usually make investment decisions for one of two rea-sons: greed or fear. The problem is, these emotions are highlyinaccurate. The big players, like the casino, make investmentdecisions with cold hard facts.

To make it-even worse, Wall Street isnt playing with any sub-

stantial risk. Take a look at the 2008 crash. The very sameplayers who caused the problem were bailed out, given hugebonuses, raises and promotions. The president might hop ontelevision and tell you we fixed that with Dodd Frank, but thatscompletely false. Since when did he tell the truth? Its not justthis president, to be fair. Every president has had Wall Streetadvisors. The president is acting in their best interests. Who doyou think he cares about? You? Some person hes never met orthe Wall Street big shot who is funding his party?


The bailout didnt fix things. The bailout just delayed thebomb from blowing up. It also made the bomb bigger. Thiscountry at some point is going to have to face the music. We willhave to get spending under control and pay down the massivedebts we have accumulated, the sooner the better. The onlything we have done so far is place a band-aid on a fatal gun shotwound. It looks better. The media is saying the economy hasrecovered. The raging bulls in the market make that recoverylook real. The very deceptive unemployment numbers make itlook even more convincing. The massive crowds beating eachother to death over $99 50 inch flat screen televisions on BlackFriday make you think the American consumer is back, andcrazier than ever. In reality, it shows the desperation that pene-trates many Americans today. Our consumer-driven culture ison the verge of collapse. We dont make anything as a countryanymore. I like pens, Cross pens to be exact. Cross is the oldestluxury American writing instrument. Cross pens are now madein China after decades of being made here in the U.S.A.

I challenge you- go through your house and find things you

bought the last 10 years that are still made in the U.S.A.. Chinais manipulating their currency to devalue it. We are doing thesame thing. Instead of cracking down on China and makingthem stop, we are following suit. Since when was the UnitedStates the follower and not the leader? Did you know China isnow the worlds largest economy? America is 2nd. We grew upin an America that was number one is so many categories. Cate-gory by category, we are losing our edge. We owe China a sumof money that will most likely never be repaid. If it is repaid, wewill devalue the dollar so much that the dollars the loans are

The Game Is Rigged 15

repaid with will be worth nothing compared to those we bor-rowed. Its robbery. Its robbery of your savings accounts. Itsrobbery of your 401k accounts. Its robbery of your childrensfuture. Its sad. I still have faith though. I have faith this countrycan be even greater than we were. Our only hope of beingrestored to that level of greatness is to return to our strongmoral foundations. If our leaders have no integrity, we cannothope to be great. A ship goes the direction of its rudders. Aplane the direction of its tail. Horses have bits in their mouths. Anation who forgets God is soon forgotten. Ronald Reaganwarned when he said Only our deep moral values and our strongsocial institutions can holdback the jungle and restrain the darkerimpulses of human nature. The Bible warned us.

The only saving grace for this country is the energy industry.

This president has done his best to prevent growth in that sectorthrough over regulation. Sarah Palin was made fun of when shesaid, Drill, baby, drill. President Obama said, We cant drillour way to lower gas prices. Here we are, December of 2014,and gas is below $2.00 a gallon. Its due to domestic drilling anda few other factors, none of which our president can take anycredit for.

Under the Obama watch, things have not really improved.

The fact is, the real unemployment number is above 12%, andthats a national emergency. The labor-force participation rate isthe lowest its been since BEFORE women started entering thework force. There are more Americans on some form of Welfarethan ever before. There are millions of people working jobs wellbelow their education and ability levels. When you have airline


pilots who are delivering pizza, there is a serious problem! Thedollar in your pocket is worth basically nothing. In 1933, 1/20oz. of gold was $1.00. Today 1/20 oz. of gold is around $71.00.

One dollar used be backed by 1/20 oz. of gold. The dollar

was the gold standard. The dollar is now weak. I dont care whatCNN tells you. Many people even question whether or notthere is any gold left in Fort Knox. That vault hasnt beenopened in forever. They will not allow an audit. They will notreopen it. The last audit was in 1953. This isnt some conspiracytheory-Members of Congress have publicly said they believe allthe gold is gone.

Could it be true? Is all the security around Fort Knox a show?

Who knows, but back to the subject of gold relative to thedollar,

Here is a shocking statistic for you In real purchasing power, your dollar is worth 1.4 cents!

Granted 1.4 cents use to be able to buy something. However,thats how bad our currency has dropped.

There are two other things I want you to look at when evalu-

ating this recovery we have had. #1 The recovery has been fueled by Monopoly Money not

real economic growth.


#2 Interest rates have been kept artificially low to prevent theU.S. from default and bankruptcy

You cant fix the underlying issues just by printing money.

Can you fix your financial problems by scanning a hundred-dollar bill on your computer and pressing print? No! Maybe youcould for a few hours or a few days, but before long youd end upin jail. The same rule applies here. The money we printed willmake it into circulation, and it will create a huge case of hyperinflation. Thats whats going to happen. It will cause a stockmarket crash that makes 2008 look like a drill. Im not going togo into great detail here, but I suggest you read The Real Crashby Peter Schiff.

Secondly, as soon as interest rates go up the United States,

the worlds superpower will default on our debts. We as acountry will be forced into a collapse. This is why interest rateshave been low for so long. The reason is pretty simple. Themajority of our debt as a country is very short-term debt. Thismeans any adjustment in the interest rates will make our pay-ment fluctuate. Do you remember the housing crisis in 2008?What caused all those people to lose their homes? Variableinterest rate loans. They had house payments that went from$500 a month to $1,500 a month over night. We are currently18 trillion dollars in debt. Think about that. The interest rate onmost of our short-term debt is around 2% making the paymenton that debt around 350 billion a year.

Imagine if the interest rate rose to 4%. That means our pay-

ment would go up to 700 billion a year. Just imagine if your


house payment doubled at a time when you were having toborrow money to stay afloat? Right now, we are having to raisethe debt ceiling just to avoid a default. When interest rates rise,then we wont have the 2008 housing crisis, we will have theReal Economic Crash. The Greatest Depression is what you andI could see-very soon.

The good news is there are steps you can take to remain unaf-

fected should all this take place. I ll be happy to show you howto protect against inflation, protect against stock market risk,protect against running out of money, and how to make veryhigh returns with low risk.

Its a three legged approach. We will use three financial

instruments to protect ourselves from any crash and have asecure retirement plan. This book primarily focuses on takingaway stock market risk. Thats one of the biggest risks you haveright now. Inflation can also be addressed using the strategiesshown throughout this book.


4Even Steven

You mean your portfolio is back to even after six years? Thats impressive!

Said Nobody Ever

I admit that quote is slightly sarcastic. The point is- making

zero percent or maybe a little above that for the better part of adecade isnt a excellent investment. Did you know the periodfrom 2000-2010 is called The Lost Decade? Why? Its becausethe market didnt return positive for over a decade. Imagine thatI called you up at 1 am in the morning and told you I had a greatinvestment idea. You would probably tell me to shove thatinvestment idea where the sun doesnt shine.

Now imagine I called you up at 1 am in the morning and told

you someone was breaking into your brand new black Mer-cedes.

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You might say you would tell me you dont have a Mercedes,

but if you did, imagine the difference in reaction. The point is:its about return of your investment, not just return on yourinvestments. Patrick Kelly makes a great point in his book StressFree Retirement when he says the best investment advice everis, Dont take a loss.

Id like to take this time to introduce you to a fictional char-

acter named John. John currently has a portfolio of $1,000,000USD and is heavily invested in the stock market. Back in 2008John lost 40% of his then $950,000 portfolio. His stomachchurned, his palms dripped with sweat, and he felt like the worldwas ending when he opened his IRA statement after the crash.John now has $1,000,000, and he thinks hes doing great. He hasa little pep in his step. He is great. Hes doing great because hehas a million dollars, but his returns are beyond dismal. Johnalso has a short-term memory. He has had so much going on inhis life that he forgets that his portfolio was worth $1,000,000way back in 1999. Then in 2000, 2001, and 2002 he lost almost50% of his money. He stuck it out, and it grew all the way backto $950,000 in 2008. Then he lost 40% of his money. Johnstayed in the market. He is now sitting a $1,000,000 again. Idont have a crystal ball but, if history repeats itself, what isgoing to happen next?

Whats the definition of insanity? The point is, in my opinion, over the past decade the market

has been a terrible investment. The bad news for the rest of us is


that John is one of the lucky ones. He didnt pull out and panicwhen the crash happened. In spite of being emotionally tied tohis money, he didnt budge. The fact is its too late after a crashto avoid one. The other side to that is once a crash occurs, itcould get worse. It depends on the underlying economic condi-tions that created the crash- investor confidence and other varia-bles.

Sometimes the best thing you can do is cross your fingers and

hope for a recovery. The S&P 500 over the last 13 years has returned around

3.5%, and thats not very impressive. The S&P 500 has hadsome very impressive years during those 13 years. It has also hadsome disasters. What if there was a way to get part of the gainevery single time the S&P 500 went up and get none of the losswhen it went down? In other words, what if you could go into acasino and lets say make 60% of the winnings on every winninghand and then never lose a hand. Would you ever leave?

You can. Well not in the casino, but in the worlds largest

casino:The New York Stock Exchange. This isnt some fly-by-night investment strategy I am speaking of here. Its one createdby the worlds largest insurance companies. Its called a FixedIndexed Annuity. Before you close the book because you dontlike annuities, remember that all things change. Annuities havegrown up a lot in the last decade. Fixed indexed annuities arebasically brand new. In my opinion, theyre the greatest retire-ment account invention ever devised.

Even Steven 23

What does a fixed indexed annuity do that no other invest-ment can?

It uses what Patrick Kelly calls the power of zero. Lets talk

about the power of zero and what it can do for you. Imagine ifevery single year the stock market went up, you made part of thegain. In years when it went down, you made zero. Lets say, forexample, you could only make 8% of the gain when the marketwent up. What would that look like? What would your returnover the last 13 years be?

First, here are the actual historical numbers from the last 14

years of S&P 500 performance. I am completing this book inDecember and didnt include 2014 as a result.

2000 -10.14% 2001 -13.04% 2002 -23.37% 2003 26.38% 2004 8.99% 2005 3.00% 2006 13.62% 2007 3.53%


2008 -38.49% 2009 23.45% 2010 12.78% 2011 -0.00% 2012 13.41% 2013 29.60% Based on the numbers above, you would have made around

3.55% per year. Now, if you made every negative year a zero,what would your returns looks like?

2000 -0.00% 2001 -0.00% 2002 -0.00% 2003 26.38% 2004 8.99% 2005 3.00% 2006 13.62%

Even Steven 25

2007 3.53% 2008 -0.00% 2009 23.45% 2010 12.78% 2011 -0.00% 2012 13.41% 2013 29.60% As shown above, it would be a 9.62% return. Thats the power

of making zero. Obviously, there is no perfect investment. If wetake all the risk away, then some of the return would have to goaway as well. Lets say instead of making the full return, youcould make a max of 8% when the market went up. How wouldthat look?

2000 -0.00% 2001 -0.00% 2002 -0.00% 2003 8.00%


2004 8.00% 2005 8.00% 2006 8.00% 2007 3.53% 2008 -0.00% 2009 8.00% 2010 8.00% 2011 -0.00% 2012 8.00% 2013 8.00% Not nearly as exciting is it? Investing isnt mean to be a thriller

movie. As we show above, it would be a 4.52% return over thesame time period. This time period includes the lost decade, theworst decade in recent market history. This is what we can showyou how to do. Most of our clients have averaged around 6%over the long term, with zero risk to their principal! Six percentmay not sound great to you. We can all get accustomed to 30%returns when the market is going great. It wont last. High

Even Steven 27

returns are almost always followed by steep losses! What goesup must come down. We can beat the bank on return yet havebank-like safety. This is what we are all about. We can get a part,or most, of the upside of the market with none of the downside.In a really volatile market, we can even beat the market! Ourgoal is to make between 4-8% a year without risk. We do this byletting the insurance company use our money to make money.In return, we should get good returns and peace of mind. Doesthat sound like a win-win situation to you? It sure does to me.

Thats one of our three strategies. For the next few chapters, Iam going to show you how you can average 4-8% without stockmarket risk. Our goal is 6-8% ,but in reality we cant predict thefuture, so I would rather say 4-8%. The only product in theworld that will let you make zero percent when the stock marketcrashes and give you a good portion of the gain when it goes upis a Fixed Indexed Annuity. Lets talk about annuities, and someof the common myths and facts surrounding indexed annuities,in particular.


5Whats an a nudity dad?

The bad news is you made nothing this year. The good news is even though the market

crashed, all the money you made last year is still there.

Eric G. Edwards

Hopefully, the title of this chapter gave you a good laugh. Iwalked in while my son was watching television with his cousinsa few days ago. He was saying to his cousins something about anannuity. At least, I thought he was. Hes only 7 so I thought, Ihave a child genius! I started to explain and he then says, sopartial a nudity is what you do for your clients? I startedlaughing. I say no. I then look up at the TV, which has a ratingfor a video game that he wants to download, and it says it haspartial nudity. I am now almost rolling on the floor, turning

29

bright red. Everyone in the room erupts. After I stop laughing, Iexplain to him that nudity and annuity arent the same. I dontallow him to download the video game, but hes a great readerfor seven years old. The fact is, many people know about asmuch about annuities as my son. Theyve heard the word.Theyve heard certain things about them. They just dont have aclue when it comes to how they work. Why should they?

Clients know I can make them money. No matter who your

financial advisor is, they can make you money. What makes mestand out is the fact that I cant lose your gains after you makethem. What?! Thats right - after you make a gain in the prod-ucts we use, you can never lose that gain due to market perform-ance. For many people that sounds too good to be true. I canunderstand. For years, I sold mutual funds, and I thought theonly way to make money on your investments was to take risks.In reality, there is no such thing as a risk-free investment. Thereare other risks besides the market going down. Risks such asinflation risk, liquidity risk, longevity risk, etc.. With that dis-claimer aside, you truly can eliminate the risk of stock marketvolatility forever and still make great returns on your money.When I started in this business, we all learned a rule called TheRisk/Reward Rule. The more risk you take, the greater yourpotential for return. This is generally true, but now, with thisnew product ,we have the exception to the rule. The exception isa Fixed Indexed Annuity. Before I show you the details, letsstart with some annuity basics.

What is an annuity?


An annuity is a contract between you and an insurance com-pany. You pay for that contract in either single or multiple pay-ments. The length of the contract is usually 5-10 years. Thatmeans you must keep your money, or at least part of it, in theannuity for that length of time. In return, for keeping yourmoney invested with the insurance company, they make certainlegally binding promises. Most annuities will allow you to with-draw a certain percentage of your total account value each yearwith no penalty. That amount is usually 10% yearly. Somepeople dont like the idea of locking their money up for 10years. There are now annuities which will return your moneyafter one or two years (without penalty) if you want it back. Ifyou plan on spending all of your retirement savings in less than10 years ,an annuity is not for you. If, however, you dont wantto run out of money in 10 years, an annuity might be just whatyou need. If you did spend all of your money in just 10 years,chances are you would not only need to get a new job, butwould also donate a large part of your money to Uncle Sam. Iam all for being patriotic, but I dont want to give the IRS mymoney. Annuities enjoy many benefits such as tax deferral. Also, they may avoid probate, they can provide income for therest of your life guaranteed and they can still pass on anyremaining money to your heirs, to name a few.

Annuities can also act as a form of life insurance for those who

cannot be insured otherwise. Many annuities will increase by aset percentage rate during the contract. At the death of theowner, all of that money would pass on to the beneficiaries.

What are the types of annuities?

Whats an a nudity dad? 31

Fixed Annuity or Multi Year guarantee Annuity (MYGA) A Fixed Annuity works a lot like a CD from a bank. It pays a

set interest rate every year no matter what. The biggest differ-ence is a fixed annuity pays a higher interest rate than a CDdoes. Fixed annuities, like a CD, have various time periods suchas 3 year, 5 year, 7 year and 10 year. The longer you stay in, thehigher the interest rate. In a fixed annuity, the insurance com-pany takes the risk for you. Its a FIXED annuity and so by defi-nition the principal inside it is protected.

Variable Annuity A Variable Annuity works a lot like a mutual fund. Instead of

buying mutual funds, you have what are called sub accountsinside the annuity. Its kind of like a super mutual fund becausethere are usually some guarantees attached to a variable annuity.That being said, YOU are taking the risk in a variable annuity,and your principal is not protected. In a variable annuity, youcan make higher returns than in a fixed annuity, but you bear therisk. Variable annuities usually have higher fees than fixed annui-ties and their mutual fund counter parts. This book is not aboutvariable annuities.

Hybrid or Fixed Indexed Annuity A Hybrid Annuity or Fixed Indexed Annuity is a cross

between a variable annuity and a traditional fixed annuity. Its afixed annuity with a twist. Since its a fixed annuity, the insur-


ance company takes all of the risk. The difference between a tra-ditional fixed annuity and a FIA (Fixed Indexed Annuity) is inhow interest gets credited to your account. This book is focusedon showing you benefits of a FIA. I will explain in detail later.Basically, your money is tied to a stock market or some othertype of index as an outside bench mark. Your money isntdirectly invested in the market. When the index goes up a por-tion of those gains are credited your account, and locked in thatyear. There is a limit to how much you can make on many fixedindexed annuities. For example, lets say the limit or cap as wecall it in the industry is 8% yearly. If the index had a gain of 10%,you would only make 8% that year. If, however, the index wentdown 10%, you would make zero. In addition to this, any gainsyou had made in previous years would still be there because ofthe power of whats called the Annual Reset.

For now, thats what you need to know. I want you to focuson the simplicity of an Indexed Annuity with a cap. If you wantan indexed annuity without a cap, there are a few new annuityproducts that dont have a cap, or ceiling, on what you make.They use whats called a spread in most cases. A spread simplymeans the amount the index must make before you start earninginterest. For example, if an annuity had a spread of 2% and theindex made 12%, you would make 10%. If it only made 2%, you would make zero. Basically, a spread is deducted beforeyour earnings are calculated, but thats only in years when theindex goes up. The spread is not charged in years when theindex goes down. If thats confusing, I will clear it up later. If anannuity has a spread, chances are it does not have a cap. Theyusually have one or the other.


What are some misconceptions or lies about annuities? Myth #1 - Annuities pay very high commissions Annuities do pay the insurance agent or financial advisor who

sells them a commission. They dont pay some sky-high com-mission such as 10% or even, as some clients have told me, 15%.In the financial services industry a fee or charge from youradvisor will generally be somewhere around 1-2%, and some-times even higher, per year. In addition to that, stockbrokersmake a commission up front when you initially invest yourmoney. That commission is usually from 2-5% the first year.Annuity specialists are typically paid about 70 basis points peryear. That is 70% of 1% per year on your initial investmentamount. It is true that the advisor who sells you the annuity canchoose to take his compensation up front, which reduces thetotal in most cases , or it can be paid over 10 years. Compared toyour stockbroker, over the long term, an annuity advisor makesless money. He or she also does not constantly buy and sellinvestments thus creating even more commission, like a stock-broker. In addition, when you make money the annuity advisordoesnt get a raise. The commissions paid to the advisor whosells you an annuity are never deducted from your money. Theinsurance company pays the advisor directly. Its kind of like anadvertising budget, in a sense. The insurance company caneither pay millions of dollars for advertising or they can pay aprofessional to market their products because word of mouthadvertising is still the very best.


Myth #2- If I take income from an annuity the insurance com-

pany will keep the rest of my money. This actually can be true, but only if you annuitize an annuity.

In the past, if you wanted income from an annuity, the insurancecompany would look at a chart called a mortality table. Theywould decide how long they thought you would live. Theywould then divide your money by the years you were expectedto live, and pay you an income from it. If you got one check anddied the next month, the insurance company kept all the rest ofthe money. If you lived way past your life expectancy the insur-ance company had to keep paying you the income until youdied. It was like life insurance in reverse. You are betting you willlive a long life and the insurance company is betting that youwill die. How nice.

With the invention of the powerful Income Rider, this is no

longer a risk you have to take. The Income Rider works muchthe same with one huge difference: any money left in theaccount passes on to your beneficiaries. It basically creates apension you cannot outlive. How good would it feel to knowyou cannot outlive your money? Now you can. Its like achecking account that fills back up every single time you spendall the money. To put that another way, its like a car that willnever need gas again. Its like a job you cant get fired from andyou dont even have to show up to work. The paycheck will


never stop coming in. You can just keep on going and enjoyretirement, while you spend with confidence! Dont you feelbetter about annuities now?

Now that you have an understanding of what an annuity is,

and the types of annuities out there, lets move along.


6Hybrid Retirement Plan

To help you retain what youve learned so far and see if anindexed annuity is for you, read on.

The greatest retirement planning vehicle ever designed hasgot to be an Indexed Annuity.

Indexed annuities arent for everyone, so before I explain thebenefits, ask yourself the following questions:

1. Are you concerned the stock market could have a dramaticcrash in the near future?

2. Would you like to make good returns on your moneywithout stock market risk?

3. Would you like to know your money is safe when themarket crashes?

4. Do you want to earn more money than the bank will payyou while still having safety?

5. Would you like to protect the gains your money makes inany given year?

37

6. Would you like to take an income you cannot out live inretirement?

If you answered yes to two or more of the above questions,you should probably own an Indexed Annuity.

Indexed Annuities are fixed annuities. This means they donthave any stock market risk. However, because theyre tied to astock market index (as an outside bench mark), the perform-ance of an index determines how much interest is credited toyour account each year, or each crediting period.

In its most basic form, an Indexed Annuity works like this: 1. You invest money or deposit premium into an indexed

annuity.2. Each year the market or index goes up, you get a part of

that gain- but not all of it. Those gains are locked in (usually yearly) and can never be lost. This is where an Indexed Annuity really shines! Where else canyou keep all the money you make, and not lose it when themarket goes south? We know the market will have up years anddown years. The good news is you can participate in some of theupside with none of the downside. This is what makes anIndexed Annuity so incredible.

3. Each year the market or index loses value, you make zeropercent instead of losing money. Zero percent isnt usually agood thing, but its a great thing when it protects you fromlosing 20, 30, 40 or even 50% in a stock market crash. In amarket crash or a negative year you make zero percent , but allof the gains from previous years are still locked in. Since theinterest earned is locked in annually and the index value isreset at the end of each year, future decreases in the index willnot affect the interest you have already earned. Therefore, your


annuity using the annual reset method may credit more interestthan annuities using other methods when the index fluctuatesup and down often during the term.

4. You can add riders to the annuity to generate income andother key benefits.

Lets look at an example in the next section of this chapter.

Hybrid Retirement Plan 39

Indexed Annuity vs. The S&P500 Example

This sub-chapter is going to explain the nuts and bolts of an

Indexed Annuity thats linked to the S&P 500, as most are. Letspretend you are my client, and you put $100,000 into anIndexed Annuity. We will pretend that contract gets issued onJanaury 1st of 2014.

We will also pretend the S&P 500 is only at 1,000 points, to

make things easy. We will also assume this Indexed Annuity hasa cap of 8%. That means you can never make more than 8%.This annuity also has a floor of 0%. That means you can neverlose money. This annuity will also reset annually. That meanseach year you start over at the new index value. If the index was1,000 in year one and it goes down to 800 over a year your newstarting point would be 800. Your actual return would havebeen 0% for the first year. In this case, thats a good thing.Remember the Power of Zero? Zero is your hero when themarket tanks!

41

Year 0 January 1st- Year zero meaning the day you invest in

the annuity. $100,000 Index goes up 20% to 1,200 points by January 1 of 2015. Year 1 January 1st $108,000 We meet to review the first-year results, and I say, The good

news is the market went up 20% the bad news is you only made8%. Your $100,000 is now worth $108,000. You are happy tomake money but send me a very cheap Christmas card thatyear.

Year 2 January 1st Index goes down 30% to 840 points by January 1 of 2016 $108,000 is still there We meet to review the 2nd-year results, and I say, The bad

news is the market went down 30% this year, and you didntmake anything. The good news is you didnt lose a dime and allthe money you made last year is still there. You now love me.You give me 25 names of everyone you know and invite me overfor Christmas dinner.


Year 3 January 1st Index goes up by 10% to 924 points by January 1 of 2017. $116,640 We meet to review the 3rd-year results, and I say, The good

news is the market went up by 10%,; the bad news is you onlymade 8%. The other good news is that all those people whostayed in the market arent even back to even and youre stillmaking money. You are starting to see the value of IndexedAnnuities and want to invest as much as you can, arent you?

This is because of the power of the annual reset. Every single

year it is like you start over and even though the index is nowbelow where you started youve made $16,640 over the courseof the first 3 years. This is how a Fixed Indexed Annuity, in itsmost basic form, works. For more specific details or to see anactual annuity and its illustration you can call me at817-704-8707. If youre skeptical, fact check me. Its okay todoubt new information. It means you have a brain!

Indexed Annuity vs. The S&P 500 Example 43

7Who cares about 1%

The most powerful force in the universe is com-pound interest

Albert Einstein

45

Welcome to the world of accounting. A world I love. My

favorite accounting principle is a very basic one. Its called theRule of 72. I use it to show you how important making a goodrate of return on your money is. Simply state the Rule of 72 saysto take the % rate you earned on your money and divide into72 ; that will tell you how many years it will take your money todouble.

This is probably the most important chapter in this book in away. Its also the shortest. To show you who cares about 1%, Iam going to use the following example. Lets pretend you are 20years old again. Thats probably okay with you. Lets say youhave $2,000, and you just stick it into an account earning 6% for30 years. How much will your money be worth? The answer is$60,000.

If I change that by 1% what do you think the answer will be?The answer is $81,000. A change of 1% made a $21,000 differ-ence. How is that? Well, the Rule of 72 says that at 6% yourmoney will double every 12 years. At 7%, its close to 10 years.This is one accounting principle you must commit to memory.Please, use the blank space below to do a few rule of 72 calcula-tions yourself. Heres an example of 6% interest for a 20 yearold investing $2,000 and leaving it until age 68.

6% Age 20-$2,000, age 32-$4,000, age 44-$8,000, age 56-

$16,000, age 68-$32,000. If we double the % rate, what do you think will happen to the

ending balance?


If you said it will double fasten your seat belt. 12% 20-$2,000 26-$4,000 32-$8,000 38-$16,000 44-$32,000

50-$64,000 56-$128,000 62-$256,000 and 68- $512,000. Thats the power of com-

pounding returns!

Who cares about 1% 47

8Never Ending Income

49

Example of an income rider on an annuity


I just dont want to eat cat food.

Response from a client when asked, Whats your goal for retirement?.

How would you like to have a pension that pays you money

for the rest of your life, no matter what happens in the stockmarket? How would you like to know that you will never, everrun out of money? How would you like to know that you willnever eat cat food? How would you like to know that you willnever choose between food or medication? That may not be aconcern right now. Things can change. How dependable is yoursocial security income? When will social security run out ofmoney? How dependable are your other sources of income?

What if I told you, we can create a never-ending supply of

income no matter how long you live? A few years ago, I sat down with a new prospective client. We

will call him Thomas. Thats not his actual name. I askedThomas what his number-one concern was when it came toretirement. He said, I dont ever want to eat cat food. Thomashas over $1,000,000 saved up in his accounts and so myresponse was ,I doubt you will ever have to.

As funny as it sounds, the thought and reality of eating cat

food is real for many seniors today. Many have to choosebetween medication and food. The Income Rider on a FixedIndexed Annuity, combined with other incomes from social

Never Ending Income 51

security, etc., can make sure our clients dont ever face thosehorrible choices.

What is an Income Rider? An Income Rider is an optional add-on to a Fixed Indexed

Annuity. It usually has a certain interest rate guarantee called aRoll Up. This guarantees that your income account value willgrow at that rate each year no matter what the market or indexdoes. These rates vary from 4-10% yearly every year guaranteed.How would you like to know you would get 4-10% growth everyyear? Who wouldnt? Disclaimer: The interest rate applies toyour GLWB, not your accumulation value. I will explain now.

Whats the catch? I am glad you asked, because there is one. The catch is the

value of the Income Rider cannot be pulled out all at once. Itmust be taken as income. There is an LPP or Lifetime PayoutPercentage assigned to the Income Rider. This LPP increaseseach year with age as you defer income. Lets look at anexample.

Thomas is 64 years old. He puts $127,000 into an annuity

from Eagle Life. This is a real product, but I am using a made-upcompany name. This annuity offers a 30% bonus in year one onthe income value, and a 7.5% bonus in year two and three.


This annuity, instead of offering 7% for 10 years or someother similar offer, pays most of the interest up front. This isideal for a client who needs income soon. Alternatively, if aclient wanted income in 10 years, being paid 7% for 10 yearswould create a larger income benefit than 45% in 3 three years.After 3 years are up, the income roll up goes down to 3% yearlyon this product. In this case, the product met the clients objec-tive of income in the near future.

This means at the end of 3 years his GLWB, or Guaranteed

Lifetime Withdraw Benefit base, will be worth $184,150. This isa 45% increase over three years to be used as income.Remember, Thomas never wanted to eat cat food. Thomas cannow have an income off of that $184,150 at a lifetime payoutpercentage of 5%. This means he can get a yearly check for$9,200 from his $127,000 investment, every year for the rest ofhis life. Lets say Thomas lives to age 90. That is pretty normalnow days. He will have pulled out around $239,000 in incomefrom a $127,000 investment. The point of this annuity was toprovide income to Thomas, not to pass on the money. How-ever, when Thomas dies, any money left in the annuity wouldpass on to the beneficiary. This protects his family if, forexample, he only received one year or 5 years of payments.Where else can you get $9,200 a year of income from $127,000investment guaranteed? Thats over 7% a year of the originalinvestment. While Thomas takes income, his original invest-ment is still growing in the index account. This means he canhopefully make up a good portion of the money he is pulling outin gains. For all intents and purposes, though, it doesnt matterwhat the index does. His income is set and can never go down.

Never Ending Income 53

Some annuity products have a feature called IncreasingIncome. This means every time time the index returns positive,the client gets a raise. How would you like to get retirementraises? Once you get a raise, your new income level is set andcannot go down. Thats the true beauty of an Indexed Annuity-you never go backwards. Bonds wont pay you that, unlessyoure willing to buy very low quality junk bonds and risk losingall of your money. Why would you do that when you can have aguaranteed high income from your retirement nest egg?


9Dont Despair Over Long

Term Care

Be nice to your children. Theyll pick your nursinghome.

A wise man

55

Shocking Statistic #1

The average cost for a semi-private room in a nursinghome is $239 per day.

Shocking Statistic #2

Today 3 out of 4 seniors will end up needing around theclock long-term care at some point in their lives. That

means you better have a plan in place.

Many seniors dont have long-term care insurance. Most cantafford it or dont want to pay the high premiums. However, the

fact is, a nursing home will bankrupt you faster than a hotblonde dating an aging millionaire. What if there was a way to

make sure if you ever needed care in a nursing home, thatmoney would be there to pay for it?


There is a way, outside of Long-Term Care Insurance. If youcan afford Long-Term Care Insurance or already have it, thats

good! If you cant afford it or just dont want to pay it, listen up!

Meet the Income Rider Doubler. A better word would be amultiplier, but they call it a doubler. Many Indexed Annuitieshave this feature in the Income Rider. This means if you ever

have to go into a nursing home, your income from the annuitywill double. This enables you to pay the nursing home and not

lose all of your assets. Thats the idea behind it. Lets use ourexample of Thomas again. Thomas had an income of $9,200from his $127,000 investment. Lets say instead of $127,000Thomas invested $500,000. His base income guarantee after

three years would be $36,250.

Lets say Thomas takes income of $36,250 for five years, butthen develops health issues. Thomas never thought he would

end up in a nursing home, but lets pretend he does. If Thomasgoes to a nursing home, his guaranteed lifetime income will

double to $72,500. I dont know what you call that, but I call itfinancial security.

Use the blank space below to outline your plan for long-termcare. It wont happen to me, IS NOT A PLAN.

Dont Despair Over Long Term Care 57

*No plan is fail proof, but we can create one thats as close to

it as possible. If you fail to plan, then you plan to fail.


10Death With Benefits

Where, O death, is your vic-tory? Where, O death, is your sting?

1st Corinthians 15:55 What if you dont need the income? I have a client who has

$2,000,000 invested with me. He doesnt need income from hismoney. He has an income from several sources. His main con-cern is growing his money safely in order to pass it on to thekids.

This is where the Death Benefit Rider can help. Most wealthy

people dont want to buy life insurance. I dont see why not. Itsa great way to pass on money tax free. I learned early in this busi-

59

ness: You can win an argument with a client, or you can helpthem reach their goals, but not both.

The Death Benefit Rider works just like an Income Rider

except you cant use the growth of this rider while youre alive. Itguarantees that your money will grow by a certain percentagerate each year no matter what. When you die that money willpass on to your beneficiaries.

You can still use money from the annuity while youre alive.

You just cant use the amount in the Death Benefit Rider. Youget to use the actual Safe Index performance. If you also have anIncome Rider attached, you can use that pool of money. How-ever, you should have a plan. You are either going to spend themoney while youre alive, or youre not. You cant predict thatwith 100% accuracy, but you should have a general idea. Ifgrowing the money for your use is more important, utilize theIncome Rider. If passing the money on is more important, uti-lize the Death Benefit Rider.

My point is: You cannot spend all your money and leave it all

behind. The Death Benefit Rider rates are currently around4-9% on the best annuities. If Thomas, from our earlier example,


had some money he didnt plan on spending in his lifetime, anannuity with a Death Benefit Rider would be ideal.

Lets say he invests $100,000 into an annuity that has a 9%

yearly roll up on the death benefit. Lets pretend he dies 10 yearslater. His account would be worth $236,000 to his beneficiariesguaranteed! This assumes Thomas didnt spend the money.You cant spend your money and keep it too. This is why, if youhave a large estate, a portion of your annuities should have theIncome Rider, and a portion should have the Death BenefitRider. Thats a general statement, but in most cases it wouldapply. Every solution should be tailored to your needs.

What I want you to keep in mind is this: the Death Benefit

Rider, the Income Rider and the Income Doubler are alloptional add-ons to the base product. The base product is, andwill always be, a Fixed Indexed Annuity. It makes some of thegains when the market goes up and none of the losses when themarket goes down. When I say market I mean the SelectedIndex Allocations. This never changes. The insurance companytakes all the risk and pays you part of the return. Thats a prettyfair deal! Metaphorically speaking, the Income Rider, the DeathBenefit Rider, and so on are all the French fries. The FixedIndexed Annuity is the cheeseburger. The fries are optional.Before you invest in a Fixed Indexed Annuity, you should meetwith a professional and determine what your overall goal for

Death With Benefits 61

your money is. Then, together, you can create the perfect planfor you. If any of this is confusing, call me, and I will point you inthe right direction. My direct number is 817.704.8707. You canalso email me with questions @ [email protected].


11Stretch that IRA all day

The legacy we leave is not just in our posses-sions, but in the quality of our lives. What prepara-

tions should we be making now?Billy Graham

What if I told you that your IRA is probably not set up in the

best way possible? What if I told you that the government is going to decimate

your IRA with Required Minimum Distributions and then whenyou die a third of it is going to be eaten alive by taxes?

What if I told you theres a way to stop them from killing your

nest egg by spreading the taxes out? Lets go back to discuss this client of mine with $2,000,000.

He has two children who both make a great income. His main

63

goal is passing on his money in a safe and tax efficient manner.He wants his money to grow for his children. He also wants toprotect those assets from the IRS. His $2,000,000 is all in a tra-ditional IRA.

Most financial advisors will simply designate a beneficiary on

your IRA. Thats good because it will help it avoid probate, butwhen his two children inherit $2,000,000 guess what? The gov-ernment just took a third of all of it. Thats not good.

When you turn 701/2, the government will make you take

money out of your IRA so you can pay taxes on it. Since youenjoyed all those years of tax breaks, now Uncle Sam wants youto pay up. To make matters worse, when you die all that moneywill typically pass on to your heirs as a lump sum. What if therewas a way to pass on money to beneficiaries so as to reduce theoverall tax burden AND leave a legacy for future generations?

What if there were a way your heirs could take an RMD each

year based on his or her life expectancy instead, so as to keeptheir tax brackets lower? Thats the idea behind it.

Its called a Stretch IRA. To cite Investopedia: The stretch IRA is not a new IRA account on the market, or

even a new investment concept, it is simply a wealth transfermethod that allows you the potential to stretch your IRA overseveral future generations. As an IRA owner, you are typically


required to take minimum distributions from your IRA at age70.5 based on an IRS life expectancy table. If you are fortunateenough to inherit someone elses IRA, you will be required totake minimum distributions each year from the IRA accountbased on your life expectancy figure - regardless of your age.

IRA accounts at death of the owner pass by contract or bene-

ficiary designation. It is the typical practice for most IRA ownersto name their spouse as the primary IRA beneficiary and theirchildren as the contingent beneficiaries. While there is nothingwrong with this strategy, it might require the spouse to takemore taxable income from the IRA than what he/she reallyneeds when he/she inherits the IRA. If income needs are not anissue for the spouse and children, then naming younger benefi-ciaries (such as grandchildren or great-grandchildren) allowsyou to stretch the value of the IRA out over generations. This ispossible because grandchildren are younger, and their requiredminimum distribution (RMD) figure will be much less at ayounger age (see example below).

Example: Traditional IRA worth $500,000 on 12/31/2009 Owner: Dave (deceased 12/1/2009); *IRA Inherited by: a) Spouse: Mary (Age 73 in 2010)- Mary will have to take an

RMD of $20,234 in the year 2010 b) Son: Mike (Age 55 in 2010)- Mike will have to take an

RMD of $16,892 in the year 2010

Stretch that IRA all day 65

c) Granddaughter: Julia (Age 28 in 2010)- Julia will have totake an RMD of $9,042 in the year 2010

d) Great Grandson: Dallas (Age 6 in 2010)- Dallas will haveto take an RMD of $6,519 in the year 2010.

*Each beneficiary will have to continue to take the RMD each

year thereafter based on the new life expectancy figure whichmust be computed each year from the IRS Publication 590(IRAs) from the Appendix C- Life Expectancy Tables section.

If Dave is careful in beneficiary selection, the younger the

beneficiary the less the RMD payment. This allows the IRAvalue to continue to grow tax-deferred, thus allowing it tostretch to several generations.


12Become Heir to a Fortune

Instead of selling off other assets, we sold one of Eds life insurance policies.

That eased our burden finan-cially and gave us peace of mind.

Pam Mcmahon, wife of Ed Mcmahon,

on working with a company I represent in selling a life insurance policy to investors.

What if I told there was an asset class only the super rich hadaccess to until recently?

What if I told you Warren Buffet invests sizable amounts of

his fortune into this asset yearly?

67

What if I told you large banks have long invested in this assetto create secure returns?

What if I told you this asset doesnt care if the market is up,

down, or sideways? What if I told you this asset doesnt care about interest rates? What if I told you it was backed by some of the largest and

strongest companies on earth? What if I told you only 1% of those who invested in this asset

ever lost any money? What if I told you this asset averages a double-digit yearly

return on investment? Would you say, Where do I sign?. If so, Im glad you like

the idea, but this isnt a sales presentation, and this book isntadvice. None of it is. Its simply ideas presented to you for infor-mation. It isnt solicitation either. If you like what I have to sayschedule an appointment, to review your needs. No client is likeany other client, and no investment is right for everyone.

THAT BEING SAID READ ON! If you werent born with a rich relative who is leaving you all

of their money, what if you could - out of thin air - create one?


What if you could become the beneficiary on large life insurancepolices of older individuals with health issues?

Sounds kind of tacky, doesnt it? Its not. Let me explain. There are now products on the

market called Fractional Life Settlements. This is not anannuity. Life insurance is a transferable asset. The SupremeCourt case of Grigbsy v. Russell (1911) established the policyowners right to transfer an insurance policy. This means theowner has the right to:

Change the beneficiary designation (unless subject torestrictions)

Assign the policy as collateral for a loan Borrow against the policy Sell the policy to another party This means you can buy other peoples life insurance pol-

icies at a discount. You can then become the irrevocable beneficiary.They get money now. You get a great asset with a guaran-

teed pay-off. The only thing we dont know is how muchtime will pass before the return on investement occurs. Wecan make that risk small by only buying policies which meetcertain standards.

What is a Fractional Life Settlement? A fractional life settlement is buying a part of someones life

insurance policy from them while they are still alive. In return,

Become Heir to a Fortune 69

you become the beneficiary on the portion of the policy thatyou own.

Why would anyone sell their life insurance policy? Many seniors who at one time had a lot of money have run

into hard times. Health issues, unexpected losses in their retire-ment accounts, increases in the cost of living, etc. are some ofthe reasons.

Sometimes these seniors just want to enjoy life, and see their

life insurance policy as unwanted. I work with a company thatwill buy these policies, assuming they meet certain criteria. Thepolicy must be investment grade.

What is an investment grade life insurance policy? An investment grade life insurance policy must meet the fol-

lowing criteria: The insured must be past a certain age, it must be a perma-

nent life insurance policy (in other words, we dont buy termpolicies), and the insured must have a life expectancy that is lessthan a certain time period, typically 5-7 years.

As an example John is 85 years old. John has a $5,000,000 life insurance

policy. John has congestive heart failure. He has recentlydecided he needs more money to pay his medical bills. My com-


pany (the one I work with) will buy his life insurance policy at adiscount. Lets say they offer John $2,000,000 for his $5,000,000policy. John accepts because he wants money now instead ofafter hes already dead. He can no longer afford the premiums,and if he tried to keep the policy, he would have lost it all. Theinsurance company would love John to let his policy lapse. Wecant let that happen. My company now owns Johns policy, andwe have paid 3 years of the premiums on it. I mention to youthat I am going to sell part of his policy to outside investors. Youdecide to buy $100,000 of Johns life insurance policy. Since wepaid $2,000,000 for it you now own 5% of a $5,000,000 policy.When John dies, you will get $250,000 or 5% of $5,000,000.Your only risk is if John lives a really long time. The average rateof return for this type of investment is in the high double digits.We have averaged a 30% return on senior life settlements withvery little risk to your money. Only 1% of all transactions haveever returned negative. Source: An audit by an outside firm. Ihesitate to include those numbers because they are so high. Idont think you should expect 30%. Thats the average. Youmight make much less. You could make more, but thats rare.To lose money, John in this case, would have to live to aroundage 100. Past performance doesnt mean you will get the sameresults. Our goal is to make 10% and above. Can you losemoney in this type of investment? Yes. Is it likely? Not at all.

* Life settlements are only offered to accredited investors. Youmust meet certain requirements to purchase. This includes invest-ment experience and net worth.

There are many other considerations when looking at thesetypes of investments. A major one is that the money held in alife settlement is not liquid at all. Until the person dies, your

Become Heir to a Fortune 71

money is tied up unless you sell your interest in the agreementto an outside party. If this interests you, please contact me formore details, full disclosure and current offerings. Rememberthe rule of 72? If you made, for example, 14% how fast wouldyour money double? The answer is 5.41 years. I cannot promiseyou that will happen, but it certainly can. If you made 12% andyour money doubled in 6 years, thats still a great investment. Ifyou made 8% and your money doubled in 9 years, thats also agreat investment. Chances are, this is a great investment for youif you have over $500,000 in investable cash. There is a smallrisk. You should not put 100% of your money in life settlements.


13Create A Tax Free Estate

Read my lips, no new taxes. George H.W. Bush

What if I told you that YOU can create a legacy? What if I told you that YOU can make sure all the future gen-

erations of your family are well- to -do? What if I also told you that you can spend like crazy, never

run out of money, AND leave behind a huge tax free pool ofmoney?

Whats the best investment on earth besides your local church

and people? Life insurance.

73

Before you throw up in your mouth, let me explain. Lets go

back to this client of mine with $2,000,000. He hates life insur-ance. Several clients of mine hate life insurance. Its normal. I amactually going to send this particular client a copy of this bookwhen its done. Hes a smart person. Most of my clients are. Hesjust been misinformed when it comes to life insurance. I knownot everyone has $2,000,000. The point is not the amount ofmoney, its the return, which is the same no matter the amount.When dealing with life insurance the internal rate of return isaffected by your age and your health.

You see, in reality, here are your options: 1. Pay for life insurance outside of an annuity, which creates a

tax-free estate (when done correctly). The death benefit is taxfree generally. In some cases advanced estate planning isneeded.

2. Pay for life insurance inside an annuity as a rider. This cre-

ates a taxable estate. Its a good option but real life insurance, ifyou qualify, is better. Rider fees are usually around a half a per-cent to 1% yearly. Some are more. You get what you pay for,typically.

3. Have no life insurance at all and leave behind a taxable

estate. I personally think this is a horrible option even if you have

millions of dollars.


The more money you have the worse this option is, in my

opinion. Why? Because of estate taxes, income taxes to yourbeneficiaries, etc. These taxes are designed to kill your financiallegacy when you die. Life insurance is designed to keep yourwealth in your family.

Why wouldnt you want to do that? If its because you want

your heirs to make their own way, I can respect that. A properlyset up trust can make sure they dont go spend their inheritancequickly. It can also make sure they dont get so much money atonce that it ruins them. It will only provide an advantage. Whodoesnt want their kids and their grand kids to have anadvantage?

Now, as Ive shown you earlier, life insurance is not only a

good investment for future generations, but since its yourpolicy, you can sell it just like its your house. This means ifthose wonderful children of yours make you mad, you can sellyour life insurance. Hang that over their head when they donthelp with the dishes at Thanksgiving! I am joking here. Lifeinsurance also build cash value inside of it. The cash value cangenerate tax-free income, when taken properly. There is a wholebook dedicated to this subject called Tax Free Retirement byPatrick Kelly. I suggest it.

So Is life insurance a good investment for me?

Create A Tax Free Estate 75

There is actually a very easy way to determine that. Its calledIRR. That stands for Internal Rate of Return. I will use anexample here to show you what Internal Rate of Return is andhow it works. First, let me teach you how to find the IRR of a lifeinsurance policy.

So how do we calculate actual IRRs on a Guaranteed Pre-

mium Universal Life policy? The annual premium is a fixed amount and we can think of

this as the Payment (Pmt).The number of years the premium is paid before death occurs

is (N).The Future Value (FV) is the Death Benefit of the policy.Since we already know the Payment (policy premium), and

the Future Value (Death Benefit), the only thing, we dontknow is the number of years until the death benefit is triggered.We can start by determining the average years of life expectancyremaining after policy inception. We look that up on a SocialSecurity Table. We can then calculate the IRR to Life Expect-ancy (LE). And we can also calculate IRR based on death at anyage along the way.

We know how much were putting in every year, and we know

what the ultimate payout will be. We just dont know when. Since the Death Benefit will be paid out income tax free, we

can also calculate Taxable Equivalent IRRs based on whatreturns it would take in the taxable world to equal what will beachieved on a Tax-Free basis with Life Insurance.


Example: Client age: 66 Premiums per year: $18,000 Coverage: $1,000,000 Premiums are less than 2% of the benefit per year. If the client dies at 71 years old, the annual IRR is 94.77%; 76

its 36.44%; at 81 his life expectancy is 15.17%, at 86 its 8.97%and at 91 its 6.23% and so on.

This doesnt even take into account the tax equivalent yield. A

tax-free yield of around 5% is equal to a taxable yield of around8% assuming a 28% tax bracket. I dont know about you, but Ilike sticking it to the IRS LEGALLY.

Yes, youre correct that you will not personally see the benefit

of this. Let me tell you what I love to do for clients who want tohave their cake and eat it too.

Those clients who want to spend their money but also want

to leave it all behind. Do you recall when I said you cant spend all your money and

leave it all behind? Thats true, but you can spend most of it andleave all of it behind. How?


Simple. Take your nest egg and invest it in a Fixed Indexed

Annuity with an Income Rider. Then use part of that income topay for life insurance. Let me give you an example. Since we arefocused on this client with $2,000,000 lets use that exampleagain.

Here are seven steps this client could take to spend hismoney and leave it behind.

1. Invest $2,000,000 into Indexed Annuities with an Income

Rider. 2. Take an income of roughly $140,000 from the Income

Rider. 3. Use $35,000 of that income to buy a $2,000,000 life insur-

ance policy. 4. Set up a trust. 5. Designate the trust as the beneficiary . 6. Spend with confidence and live life. 7. Know you have not only secured your own life time income

but also changed the future of many generations. If you have a hard time understanding this, I know such mat-

ters can be confusing. Contact me, if you have questions. Whendealing with tax implications, stretch IRA set up, trusts and so


on, things get complicated. You need professional advice. I amnot a lawyer or CPA, but I work closely with the best around.This book is not advice for your particular needs.


14Why A Trust Is A Must

Never say you know a man until you have divided an in

heritance with him.

~ Johann Kaspar Lavater This chapter deals with some ugly things such as divorce and

death. I made it comical because if we cant laugh, we cry. I hopemy use of comedy in an area such as this is acceptable.

I am not a lawyer, but I work with lawyers who are excellent

in this area. This information is not legal advice, its just infor-mation.

Sitting down with clients, I always ask if they have a living

trust. The answer is almost always, No. My reply is always,Why not? .

81

Probate is horrible. It costs you money. It ties up your assets,or can. It is public information, and its easily avoided.

What is probate? Hi! Youre dead. Not really, but lets pretend you are. Since

youre dead, who is going to sign your name? The judge will.Thats probate. Lawyers love probate because they charge a fee,usually 4-7% of all your assets, to help out. This means if youleave your family $1,000,000, and it goes through probate, thosenasty little blood sucker lawyers are going to get up to $70,000of your money.

What do you do? Pay those blood sucker lawyers a couple thousand now and

avoid the probate fees. No offense to my lawyer friends. How do you avoid probate? By setting up a living trust. I am not going to go into all the particulars of a trust here. I

dont get paid to do that, and I know enough to be dan-gerous. But I will tell you some basics.

What else does a trust do? When set up correctly, a trust not only stays out of probate, it

also protects against creditors and predators.


For example, lets say you want to leave your money to your

son, Willy. Willy marries a girl named Silly. You have life insur-ance and when you die, Willy gets $1,000,000. Silly sees thatWilly has just hit the big time. She files for a divorce and takes$500,000 of that inheritance. Shes a Nice Girl. You wantedthe money to be passed on to your grand kids if Willy wasntthere. Instead, half of your money went to Silly, and she spent itall in three years on cars, plastic surgery and vacations. Willy isheart broken and spends the other $500,000 bar hopping.Tragic isnt it?

If you had a trust that was set up correctly, that would not

happen. You see, Willy wouldnt inherit $1,000,000, the trustwould. Since Silly is not married to the trust, she cant divorceWilly and take his inheritance. The trust also designated atrustee and a successor trustee for the benefit of Willy and hisfuture children. This can also prevent Willy from blowing a mil-lion dollars on Silly while they are still married.

Seriously, you need a trust. When Willy (or your heirs)

inherits a million dollars (or any substantial amount), Silly orhis or her spouse might really run off to some island with yourmoney, honey. However, you will set up a trust if youre smart,and in the end Silly and Willy stay married. Your grand kids areraised in a two-parent home, and Willy never develops adrinking problem. All because you set up a trust. Im being a badcomic here but in reality, this isnt that funny. The fact is,divorce divides fortunes even several generations later.

Why A Trust Is A Must 83

Im tired. Its late, and Im drinking coffee to finish this book,so excuse the nursery rhymes. I think they add a little flavor toan otherwise burdensome subject. I hate divorce. Im marriedand I love my wife. I hope we never divorce. Finances causealmost 50% of divorce, and there should never be a financialincentive to divide a family.

SoInstead, lets say Willy inherits your $1,000,000 life insurance

policy and the next day he goes to the bar and has two beers.Hes not drunk. Hes just celebrating your demise. I mean,mourning over the loss. Willy leaves the bar with Silly. He getsinto an accident thats not even his fault. Unfortunately for him,he ran into a professional accident waiting to happen. Thisperson calls up the best lawyer in town who sues Willy and Sillyand takes your $1,000,000 life insurance benefit that you left toyour son. Willy and Silly end up on food stamps and talk aboutthe good old days when they used to be millionaires. They endup divorced. Broke people are stressed people.

If you had a properly set up trust, this wouldn t, or at least

shouldnt, happen. You see, Willy didnt inherit $1,000,000 - the trust did. Since

the trust didnt get into a car accident, this poor little devil of aperson wont get your $1,000,000 that you left for your son.Thats another advantage to a trust. There are literally hundredsof good reasons you should have a trust. A will is not sufficient. Ihope this helped you learn something about a living trust. If youalready have a trust, I suggest having someone give it a look overevery now and then to keep it updated or provide a 2nd opinion.


After all, its just your legacy, your life savings and your hardwork that created your estate.

Why A Trust Is A Must 85

15The Best Annuity For Last

Everyone brings out the choice wine first and then the cheaper wine after the

guests have had too much to drink; but you have saved the best till now.

John 2:10 Im pretty sure the saying saving the best for last came

from this passage in the Bible. I am no Jesus but in grand finale fashion, I believe this to be

the most exciting chapter of this book. Im feeling like removing the ceiling. What do I mean? I am buying a convertible? No. What if you could find a Fixed Indexed Annuity with no cap?

87

WaitAre you saying I can have total safety on my money

and unlimited growth? Yes, I am. There are some trade offs butyes, thats what I am saying, right here in black and white. Iveput it in writing, as they say.

What if there was no limit on your upside potential, and

you still had downside protection? Obviously, there is nosuch thing, right?

Wrong. There actually is; however, there is, of course, a

catch. Its called a spread or, sometimes, a fee. I hate fees, butin this case they can actually be good. Do you remember ourexample of a Fixed Indexed Annuity with a cap of 8% perannum? What if, instead of a cap, you had a spread? NOTE: Afee can be good, COMPARED to a cap. A spread, in myopinion, is the best because its only applied when you makemoney.

What is a spread? Simple. A spread is the difference between the return of the

index and what you actually make in any given year. Lets look atan example. Lets pretend you have an indexed annuity with aspread of 4% for each year. Granted 4% is a lot, but looking atthe yearly returns of the market it usually breaks double-digitreturns in years when it goes up.

So, lets look at 2008- 2013 as an example. If you had an

indexed annuity linked to the S&P 500, with an annual reset and


a spread of 4%, what kind of return would you have made? In2008, the index lost almost 40%. No spread would apply, andyou would have just made 0% that year. Zero is your hero! In2009 the S&P 500 returned 23.45%, so minus the 4% spreadyou would have made 19.45% that year. In 2010 the S&Preturned 12.78%, so minus the 4% spread in this case you wouldhave made 8.78% that year. In 2011 the S&P returned 0%,so since the spread only applies to years when you make moneyyou would not be charged a spread. In 2012 the S&P returned13.41%, so minus the 4% spread you would have made 9.41%that year. In 2013, the S&P returned 29.60, so minus the 4%spread you would have made 25.60% that year. The indexreturned 6.79% a year on average from 2008-2013. This annuityin our example would have returned over 10% per year onaverage. Protect your downside risk. It can lead to better longterm accumulation.

This example includes the worst year in stock market history

from recent memory. To admit my bias that makes the annuitylook great, but thats the point. The point is, you can make greatreturns without the risk.

NO!! You will not make the full gain of the market or index

when it goes up, but you can make a good portion of the upside,and none of the downside. Its not brain surgery. There arem

crash proof portfolio

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