Train your brain for efficiency

Chances are you have cooked some pretty elaborate plans to trick yourself into being more productive.

Have you considered the role your surroundings play in your everyday life? It turns out that one of the easiest ways to bring about change in our lives is to actually change our environments. What if the layout of your bedroom or the distance from your desk to the kitchen was impacting your productivity and decision making? There is plenty of room for each of us to improve. Here is how and why making some changes to your environment works.

Your brain is efficient
Making decisions is draining. (Heard of “decision fatigue”? It’s real!) We can only make so many choices per day before we start to run out of steam and need a rest. But we are faced with countless choices every time we wake up! Should I go back to sleep? Should I shower or brush my teeth first? What will I wear to work? Should I try out that new shortcut to the office? It can become stressful for your brain to struggle with a choice every time one of these little prompts presents itself. That is why we rely on decision shortcuts called habits.

A habit is just a routine that you regularly perform. Most of the time we don’t even notice that we are engaging in a habit because it’s second nature to us. And there is a reason for that. It is your brain saving energy by going on autopilot to perform an action without having to make a decision. That way you can use the bulk of your mental power on unique and important problems that might pop up during the day, not on thinking about when you should brush your teeth!

Trick yourself into making wise decisions
What does your brain’s love of shortcuts have to do with your environment? Let us look at an example.

Your alarm clock is right next to your bed. It goes off every morning at 7:30am. It does not take you long to figure out that you can smack the snooze button and go straight back to sleep with hardly any effort. Before long you have hitting the snooze button every time the alarm goes off without even thinking about it. You have trained yourself to sleep in later by making your alarm easier to turn off. But what if your alarm was on the other side of your room? What if to silence it you had to stand up, walk over, and hit a button? That simple change could give you the jolt that you need to wake up and get your day started on time!

Take a look at your surroundings and ask yourself what kind of behavior it encourages. Is it more convenient for you to grab a soda from the fridge or fill up your water bottle? When you work at home, are you in the middle of distractions like the kids playing or too close to the TV? At work, does your office layout lend itself to productivity or socializing with your co-workers?

It might take some legwork to get started but try to arrange your life in a way that makes wise decisions easier. You might be surprised by the results!

Are Annuities Taxable?

The answer is complicated (but generally, yes they are)

Let’s assume that you have already done your research on the workings of an Annuity and you are almost convinced that it is a good investment for you and your future plans.  Now, let’s consider if the taxability of this product is what you are looking for.

First, if you purchase an annuity with pre-tax dollars, payments from the annuity are fully taxable as income. But, if you buy an annuity with after-tax funds, you are required to pay taxes only on the earnings (ie, profit).  Annuities offer tax-deferred growth, which means taxes on annuities are not due until you withdraw money from the annuity.  One of the main tax advantages of annuities is they allow investments to grow tax-free until the funds are withdrawn.  This includes dividends, interest and capital gains, all of which may be fully reinvested while they remain in the annuity.  This allows your investment to grow without being reduced by tax payments.

But this seemingly simple perk is accompanied by a raft of complicated rules about what funds are taxed, how they are taxed and when they are taxed.

Because of the complexity, it is best to consult with a tax professional when purchasing an annuity and before withdrawing any funds.

Are Annuities Taxable?

Annuities are tax deferred.  But that does not mean they are a way to avoid taxes completely.  What this means is taxes are not due until you receive income payments from your annuity.  Withdrawals and lump sum distributions from an annuity are taxed as ordinary income.  They do not receive the benefit of being taxed as capital gains.

How are Annuities Taxed?

When it comes to taxes, the most important piece of information about your annuity is whether it is held in a qualified or non-qualified account. Remember, qualified is that the taxes are behind the tax wall and are allowed by IRS to be deferred.  Non-qualified means that the taxes have already been paid. In this case, the earnings (or profits) are taxable.

Qualified Annuity Taxation

If an annuity is funded with money on which no taxes have been previously paid, then it is considered a qualified annuity.  Typically, these annuities are funded with money from 401ks or other tax-deferred retirement accounts, such as IRAs.

When you receive payments from a qualified annuity, those payments are fully taxable as income.  That is because no taxes have been paid on that money.

But annuities purchased with a Roth IRA or Roth 401k are completely tax free if certain requirements are met.

Non-Qualified Annuity Taxation

If the annuity was purchased with after-tax funds, then it is non-qualifed.  Non-qualifed annuities require tax payments on only the earnings (or profits).

The amount of taxes on non-qualifed annuities is determined by something called the exclusion ratio.  The exclusion ratio is used to determine what percentage of annuity income payments is taxable and which is not.  The idea is to determine the amount of a withdrawal or payment from an annuity is from the already-taxed principal and how much is considered taxable earnings.

The exclusion ratio involves the principal that was used to purchase the annuity, the amount of time the annuity has existed and the interest earnings.

If an annuitant lives longer than his or her actuarial life expectancy, any annuity payments received after that age are fully taxable.

That is because the exclusion ratio is calculated to spread principal withdrawals over the annuitant’s life expectancy.  Once all the principal has been accounted for, any remaining income payments or withdrawals are considered to be from earnings.

Exclusion Ratio Example

  • Your life expectancy is 10 years at retirement.
  • You have an annuity purchased for $40,000 with after-tax money.
  • Annual payments of $4,000 – 10 percent of your original investment – is non-taxable.
  • You live longer than 10 years.
  • The money you receive beyond that 10-year-life expectation will be taxed as income.

Annuity Withdrawal Taxation

How and when you withdraw funds from your annuity also affects your tax bill.

In general, if you take money out of your annuity before your turn 59 ½, you may owe a 10 percent penalty on the taxable portion of the withdrawal.

After that age, if you take your withdrawal as a lump sum, you have to pay income taxes that year on the entire taxable portion of the funds.  If money is left in your annuity account, the IRS considers the first and subsequent withdrawals to be interest and subject to taxes.

Annuity Payout Taxation

According to the General Rule for Pensions and Annuities by the Internal Revenue Service as a general rule each monthly annuity income payment from a non-qualified plan is made up of two parts.  The tax-free part is considered the return of your net cost for purchasing the annuity.  The rest is the taxable balance, or the earnings.

When you receive income payments from your annuity, as opposed to withdrawals, the idea is to evenly divide the principal amount – and its tax exclusions – out over the expected number of payments. The rest of the amount in each payment is considered earnings subject to income taxes.

Inherited Annuity Taxation

If you are the beneficiary and inherit an annuity, the same tax rules apply.  The main rule about taxation with an inherited annuity or one that is purchased is that any principal that is funded with money that was already subject to taxes will not be taxed.  Principal that was not taxed and earnings will be subject to taxation as income.  The amount of previously taxed principal included in each annuity income payment is considered excluded from federal income tax requirements.  This is known as the exclusion amount.

In Summary

If you just take the opinion of Mom, Dad, Gramma, Uncle Joe, Preacher Mike, Mr. Ramsey, Mr. Howard or even simply the Web then you are not making the best, most educated decision.  Do your due diligence and ensure that you talk to an industry professional.  What happens if Uncle Joe tells you what happened to him 30 years ago and you should “never invest in one of those annuity things”. Well, first of all what is his profession and how old was the product he purchased at that time.  Could things have changed in those years?  How about being at a family reunion and Gramma tells you that she just heard Mr. Howard talking about how some people lost money when they annuities a few years ago.  Even though you love Gramma, is she a financial professional with current experience and education.  So, in summary, annuities can be taxable in the right situation.  This is definitely something that you need to have reviewed by your Financial Professional.  Best of luck on your investment.

It’s time for a Digital Lifestyle

It’s time for a Digital Lifestyle

When the baby boomers were born, there were 45 workers for every retiree collecting social security. Now it is less than 3 to 1, an unsustainable ratio that calls the future of social security into question.

Though pensions were declining before the Great Recession, the corporate world has now all but abandoned them. Colliding with the economic devastation is the other transformational event.

Advances in medicine, nutrition and technology have stretched the average human lifespan beyond 75 years, adding an additional two decades or more. Baby boomers and following generations can now expect to live well into their 80’s, 90’s or longer. Seemingly a blessing, this new expectation poses a terrifying threat – the likelihood of going broke in old age.

61% of people are more afraid of outliving their money than dying. An unstable economy. An unreliable market. The collapse of the old retirement model. The financial burdens of a longer life. It is the end of wealth and retirement as you know it, and with it, a new beginning.

Yesterday’s financial models may be gone, but prosperity in our nation is far from over. The realities challenging today’s generations have triggered an unprecedented wave of financial activity, with billions of dollars and millions of people on the move. This wealth wave has ushered in the greatest economic story of our time.

The leaders of the financial industry will position themselves to serve baby boomers, Generation X and millennials by redefining how wealth is built and how people can thrive after 65.

Tens of thousands of new financial professionals are needed at a time when their ranks are ageing and their numbers are diminishing. Someone must respond to this critical need with a new wave of financial professionals for the future. That someone, that wave, is us.

We are responding to this crisis with our biggest expansion in three decades. Only four states in the US offer a financial education in public schools. Our nation has paid the price. We offer an unparalleled financial education to those who have never been exposed to such essential concepts as The Rule of 72, The power of compound interest and the impact of losses and taxes.

We give families a safety-first approach by helping them protect their income and their future with financial vehicles designed for the realities of today. Our associates present families with insurance products that have evolved to offer a wide array of benefits, like tax-free income and long term care protection.

We provide a world class wealth management platform that offers everyday investors a financial game changer, access to active management strategies that were once only available to the very wealthy. And finally – and perhaps most importantly – we open the doors for anyone, regardless of their age or experience, to become part of the wealth wave by building their own financial services business.

Behind our team is a world class financial organization. Their entry-level leaders, many part time, with full licensing average $80,000 per year in earnings, with the highest exceeding $640,000. Associates at our top executive positions are averaging almost $900,000 annually, with the highest earning over 7 million dollars this year alone.

Our business is an entrepreneurial opportunity with no boss, no salary caps, no required work hours, no layoffs and no limits on how much you can earn or how fast you can grow. You can earn more income from your own efforts and from those of your team and you can earn income from products that produce first year and recurring revenue.

It is a business that can give you the three things you may have thought you’d lost forever. The chance to make a difference, the opportunity to build personal wealth and the hope that your later years will be lived on your terms.

Regardless of your age or experience, this could be the right business at the right time for you. Few opportunities give you the support of some of the financial industries’ strongest and most recognizable names. Put your company’s history, experience and reputation behind you and become part of a championship team.

In this new frontier of wealth and retirement – baby boomers, Generation X and millennials all around you need a financial professional with a way forward.

Why not let it be YOU!

Can you use your Life Insurance in your Retirement Plan?

Can someone use their life insurance in their retirement plan?

Let’s first explore what retirement looks like these days.  For clarification, the main difference between a strictly unemployed person and a retiree:  Someone in retirement currently has some type of income.  This retirement usually comes in one of two different ways:

  1. Either a pension or some type of investment like a 401k or IRA.
  2. Government funds such as Social Security.
  3. Saving a lump sum of money and withdrawing from it regularly, such as an inheritance or an annuity.

For the example below, let’s assume you don’t have a pension from your company nor a 401k or IRA. In this scenario, your retirement would be 100% dependent on your savings.

The amount you require to successfully retire is dependent on two main factors:

  1. The annual income that you desire during your retirement years.
  2. The length of time you desire to have that income aka as RETIREMENT YEARS.

To keep things simple, say you want to retire at 65 years old with the same retirement income per year as your pre-retirement income per year – $50,000. According to the World Bank, the average life expectancy in the US is 79 (as of 2015).¹ Let’s round it up and call it 80 for our example which means we should plan for income for a minimum of 15 years. (For our purposes here we’re going to disregard the impact of inflation and taxes to keep our math simple.) With that in mind, this would be the minimum amount we would need saved up by age 60:

$50,000 x 15 years = $750,000

There it is: to retire with a $50,000 annual income for 15 years, you’d need to save $750,000. The next challenge is to figure out how to get to that number (if you’re not already there) the most efficient way you can. The more time you have, the easier it can be to get to that number since you have more time for contributions and account growth.

If this number seems daunting to you, you’re not alone. The mean savings amount for American families with members between 56-61 is $163,577² – nearly half a million dollars off our theoretical retirement number. Using these actual savings numbers, even if you decided to live a thriftier lifestyle of $20,000 or $30,000 per year, that would mean you could retire for 8-9 years max!

One option that you could consider is a tool that you don’t normally consider when preparing for retirement.  Your life insurance policy.

One of the benefits of a permanent life insurance policy is the ability to accrue “cash value”.  In its simplest form, the cash value within a policy is the balance remaining after a portion of a premium payment is applied to insurance costs.  It is this feature that provides a few different uses for life insurance in retirement. The cash-value account grows over time and can be withdrawn as a source of income as long as the withdrawal amounts don’t exceed the amount paid in premiums.

Another option is to borrow from the cash value.  Think of it as a loan you are getting form your future self.  Technically, you’re not required to pay it back, although it will accrue interest and ultimately the loan amount will be deducted from the death benefit  (which is the amount paid to your family upon your death).

This brings up another discussion point:  Term Life Insurance.  This is life insurance that does NOT provide a cash value option, does not have a withdrawal or borrow opportunity but it DOES provide a death benefit coverage for your beneficiary(ies).  If your term policy is close to expiring or you only have a term policy through your employer, you need to obtain a new illustration to see what the cost might be in your retirement years and even IF you can qualify at that point.  Weighing out the cost now for your current self, versus the cost your future self could pay has to be considered now.

All of this information may be hard to hear for the first time, but it is the first real step to preparing for your retirement.  Knowing your number gives you an idea where you want to go.  After that, It’s figuring out a path to that destination.  If retirement is one of the goals you’d like to pursue, let’s get together and figure out a course to get you there — no math degree required!

Sources:
¹ “Life expectancy at birth, total (years).” The World Bank, 2018, http://bit.ly/2I8w4gk.
² Elkins, Kathleen. “Here’s how much the average family in their 50s has saved for retirement.” CNBC, 4.21.2017, http://cnb.cx/2FX0Ckx.

₃  Investopedia. Do You Need Insurance After Your Retire? Tim Parker. January 7, 2016.