Category Archives: Rick kahler

Shame On Rick For Disparaging The BYOB Scheme

May 21, 2013 6:38 pmLeave a Comment

ou can go to the bank on this: every time I write something negative on any insurance product the proponents of these products come out of the woodwork, kicking and screaming.

My recent article on the Be Your Own Bank (BYOB) scheme didn’t sit well with Clark Sowers, Belle Fourche, SD, who wrote a letter to the editor of the Rapid City Journal shaming and disparaging me for my characterization of cash value insurance as a scam.

The only problem is that I didn’t call whole or cash value life insurance a scam.  I did, however, call the BYOB scheme “one step from being a scam.”

I found it very interesting that Sowers says BYOB is promoted by other fee-only planners, inferring I must be out of step with my profession.  I have never met a fee-only planner that promoted the BYOB concept, and I know a few thousand of them. I would be very interested in meeting a fee-only planner who promotes it.

Sowers also says my article is simply an advertisement for weak alternatives to cash value insurance.  I reread my article three times and have yet to find any alternative I promoted in the article, outside of “Don’t do it!”.  I certainly could have promoted a number of very strong alternatives, like putting your money in a real bank or 401(k) and avoid paying all the high fees to the BOYB shysters.

Finally, Mr. Sowers’s justification for cash value life insurance rests on the fact that General George Custer financed his trip to DC to save his career.  While that may be true, stories like this are ubiquitous with the BYOB people.  They are quick to point out that Walt Disney, J.C. Penney, Sen. John McCain and, yes, George Custer all used policy loans to finance projects and therefore, you should too.  They don’t bother to discuss that the circumstances, fees, and policy structure of the policies these people owned, compared to the policy they want to sell you, may be equating apples with mussels.

It’s too bad that legitimate life insurance professionals are not stepping up and protecting their brand by distancing themselves from this type of shady marketing. There are many honest life insurance salespeople who would agree.  The bottom line is that the BYOB spin is a scam and it’s hurting the life insurance industry as a whole.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Current Events, Featured Contributors, Rick KahlerTagged

Client-Focused Financial Planning Addresses Money and Emotions

May 21, 2013 7:22 amLeave a Comment

Anyone who sent a check to the IRS this month certainly doesn’t need to be convinced that there is a relationship between money and feelings.  I can personally attest that paying a hefty tax brings up a great deal of painful emotion.

The case for the union of money and psychology is overwhelming.  Almost everyone experiences fear, sadness, grief, anger, or happiness around money events.  Large life events like divorce, death, bankruptcy, losing a job, and selling a home clearly involve money and evoke emotions.

We may be less likely to notice the psychological aspects of smaller money events.  Yet even acts like paying monthly bills, buying birthday gifts, or shopping for groceries have an emotional component.

Researchers like psychologist Daniel Kahneman (who won the Nobel prize in economics) find that 90% of all financial decisions are made emotionally, not logically.  Even the seemingly cold and calculating world of investing is driven by emotions.  Economic theory is being set on its head as economists are slowly coming to realize that, regarding money, consumers often don’t make rational decisions that are in their best interests.

Yet 18 years after a small group of pioneering financial planners and therapists first met to explore the relationship of emotions and money, the field of financial psychology is still in its infancy.  It’s really no wonder.

On the money side of the equation, we have institutions like large brokerage houses, insurance companies, and banks. Like all businesses, they need to be profitable.  Any concern these institutions may have about the union of finance and psychology is likely to focus on ways to manipulate customers’ emotions in order to sell more of their goods and services.

On the emotional side, psychologists and therapists rarely mention money issues.  When they do talk about money, it’s often in the context of their own fees.  Their training doesn’t address the idea that both they and their clients may have emotional issues or beliefs around money that could be destructive.

This leaves a big gap.  In the middle of it are consumers who don’t know how to develop healthier patterns of behavior around money.  They may overspend to relieve stress, feel overwhelmed by credit card debt, be unreasonably fearful about financial security, be overly trusting or overly suspicious, or give or lend too much to family members.

Some of these consumers have at least some idea that their destructive financial patterns are psychological.  They may realize they need more than financial facts to change those patterns.  Yet they may have no idea where to find the help they need.

The one group of professionals that is moving to fill that need is client-focused financial planners.  Unlike advisors who sell financial products, client-focused financial planners receive no commissions but charge fees for their advice.  By law, they must act as fiduciaries and advocates for their clients.

Historically, financial planners have not embraced the notion of money psychology.  Obtaining the Certified Financial Planner® designation still requires no formal training even in client communications or conflict resolution.  Yet a small but growing group of client-centered financial planners is seeking out training in psychology and communication.  A few even partner with financial therapists.

The challenge for consumers is how to find these professionals.  One source is the Financial Therapy Association, which has a list on its website.

Gradually, more consumers as well as professionals are realizing that it’s possible to combine financial knowledge and psychology to create more balanced relationships with money.  This awareness is sure to increase the demand for financial psychology services.  It will be exciting to watch this infant profession as it grows.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Featured Contributors, Financial Planning, Financial Therapy, Psychology of Money, Rick Kahler

Proposed Cap on IRAs Would Touch Middle Class

May 13, 2013 7:09 pmLeave a Comment

Coins in a Glass Jar“Max out your retirement plans every year” has long been standard advice I’ve given to working adults who want to secure a reliable income when they retire.  Individual Retirement Accounts (IRAs), along with 401(k), 403(b), and profit sharing plans offered by some employers, are among the most accessible ways for middle-class workers to provide for retirement and build wealth.

If a proposal in President Obama’s budget plan is approved by Congress, however, retirement plans may no longer be the first and best stop along the road to financial independence.

The proposal would limit a person’s total balance in all tax-advantaged retirement plans to the amount it would cost to purchase an immediate annuity paying $205,000 a year.  This appears to not be indexed for inflation.  The articles I’ve read and my own calculations suggest this would mean capping retirement accounts at around $3 million.

From the sketchy details available so far, the proposal appears to target traditional IRAs and other tax-deferred retirement plans.  Contributions to these accounts are made with pre-tax dollars, and the earnings in the account are not taxed until they are withdrawn.

Since 58% of Americans don’t have any retirement plan, my guess is they will pay little attention to this proposal.  Saving $3 million dollars seems well out of reach.  While that may be true in today’s dollars, it most likely will not be true in future dollars.

If inflation over the next 40 years matches that of the past 40, a $3,000,000 IRA in 2053 will be equal to $575,000 today.  If today’s 25-year-old, retiring then, wanted to be sure the money would last another 40 years, the IRA would provide an income equivalent to about $1,500 a month.

Even in today’s dollars, the $3 million maximum isn’t as unreachable as it may seem.  Employees can currently contribute a maximum of $5,500 per year ($6,500 for those 50 and older) to Roth or traditional IRAs.  Small business owners and the self-employed may have SIMPLE (savings incentive match plan for employees) or SEP (simplified employee pension) IRAs.  The maximum annual contribution is currently $17,000 for a SIMPLE and $51,000 for a SEP. A self-employed plumber, business owner, or doctor who was a conscientious saver with a diversified portfolio could certainly accumulate $3 million over a lifetime.

Or suppose the wife of a small business owner was a self-employed counselor with her own SEP plan.  If he died at age 58 and she inherited his IRA, the combined totals could easily put her over the $3 million cap.

It isn’t clear how the proposal would equate the withdrawal rate with the cap.  One possibility would be to raise the required minimum distribution amount, which would erode the value of an IRA more quickly.  Another option would be to penalize excess accumulations with a hefty tax of 40% or more.  Of course, the President could follow in Argentina’s footsteps and just confiscate any amount over the cap.  Any of these would add to the diminution of retirement plans as a vehicle for income during retirement.

The proposal includes this statement: “But under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”

Apparently we, as individual citizens, are not considered capable of defining “reasonable levels” of retirement saving for ourselves.  The real goal of this plan appears to be wealth distribution, instead of encouraging more Americans to save and provide for their own retirement.

You can read more about this proposal at Bloomberg and Market Watch, and here is a link to the President’s budget.  If this proposal is passed, retirement plans will play a much smaller role in many middle class Americans’ golden years.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Current Events, Featured Contributors, IRA, Rick Kahler

Obama Proposes $3 Million Cap on IRAs

May 9, 2013 6:18 amLeave a Comment

I listened to several of the Sunday talk shows and while there was criticism of the President saying the CA attorney general was good looking, there wasn’t a word about his unprecedented attack on IRAs in his new budget proposal, which was made public on Friday.

The administration released a preview of their budget proposal which would save around $9 billion over a decade by capping the amount a person could withdraw or hold in their retirement plan, like an IRA.

According to an articles in The Hill,  Bloomberg, and Forbes one of the President’s spokespeople said that wealthy taxpayers can currently “accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”

The President’s proposal will mandate that no one can withdraw from their retirement plan more than $205,000 per year.  The article suggests that means a cap of around $3 million for retirement.  The article is not clear how the proposal equates the withdrawal rate with the cap.  It is possible the President wants to either raise the RMDs, cap withdrawals, or cap the balance allowed in retirement plans, or perhaps a combination of all the above.

One way to interpret the sketchy details is this proposal may raise the required withdrawal rate on a balance of $3 million to $205,000, or about 7%.  Currently the RMD is around $120,000, so hiking the RMD to $205,000 would erode IRAs even faster, subjecting them to income taxes much earlier than currently.

Whether the cap is on withdrawals, the RMD is raised by almost two times, or they cap plans at $3 million; you can be sure IRAs will play a much smaller role in many American’s retirement plans.TaxForms

Of course, this is exactly what the administration is attempting to encourage.  The goal is overt wealth distribution.  This is Obama’s comment to Joe the Plumber that he needs to spread his wealth around in action.  By their own admission, the White House is making a grand edict that no one needs over $205,000 a year in retirement income or $3 million.  So, they intend to penalize those hard working Americans who save for retirement, encouraging them instead to join the ranks of those who spend today and look to the government for support tomorrow.

There is a hint in the articles I’ve read that the IRA cap is retaliation against Mitt Romney, who accumulated tens of millions in his IRA.  The inference is that the former Massachusetts governor must have done something illegal to squirrel away so much money in that sort of retirement account.

I am guessing the average American, who lives month to month and doesn’t have an IRA, will turn a deaf ear to this proposal, thinking that $3 million is significantly beyond what they will ever save.  While that may be true in today’s dollars, it most likely will not be true in future dollars.

A 25 year old who hasn’t begun to think about an IRA today, probably will have a significant change of opinion when they are 65. If inflation averages over the next 40 years what it has over the last 40 years, a $3,000,000 IRA will be equal to $575,000 today.  And what type of retirement will $575,000 buy you if you don’t want your money to run out over your lifetime?  An income of about $1,500 a month.

While we wait for more information, the intention of this administration is very clear. People who want to earn and achieve financial independence, which is above a level approved by the government, are becoming personas non gratis in the United States.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Current Events, Featured Contributors, IRA, Rick Kahler

BYOB? Don’t Join This Party.

May 6, 2013 1:33 pmLeave a Comment

PainRelieverBYOB–or not.

Sorry, I’m not inviting you to a “bring your own beverage” party. I’m warning you away from a get-rich scheme called “Be Your Own Banker.”

This idea has floated around the Internet and late-night television for a while now. One of the latest versions is touted on a website that I’m not going to name because I don’t want anyone getting sucked into what is essentially one step from being a scam.

Once you drill down past the initial layers of ambiguity, the basic concept seems simple enough. You buy a large whole-life insurance policy. After you pay into it for several years, it will accumulate a cash value. Then, any time you make a major purchase like a new car, you can borrow against your insurance policy instead of going to a bank.

According to the people selling this concept, you are the big winner here because you’re paying interest to yourself, not the bank.

The BYOB salespeople are incredible marketers. This must be where political campaign managers ply their trade in between elections. They blast our financial system, banks and bankers, mutual fund managers, and financial advisors. They profess to care about the customers they call “clients.”

The half-truths and misstatements from these sellers are enough to elevate the blood pressure of any fee-only financial planner. They use terms like “depositing cash into a life insurance policy” and “having control of your own banking system.”

Amid all this unbelievable double-talk, they forget to mention one little detail. All that money that you “invest” in your whole life insurance policy is paid in the form of premiums. You aren’t paying it to yourself. You’re paying it to large life insurance companies—which, by the way, are an integral part of the financial system they blast.

Let’s look at some actual numbers. You pay $12,500 a year in premiums for a $125,000 whole life insurance policy. In four years, after paying in a total of $50,000, you would have $46,110 dollars in your account. Yes, this is less than you put in, as the fees and premiums add up to be more than the growth rate. You can borrow up to 90% of the net value, or $41,500.

You will pay the company 5% for borrowing your own money. Supposedly, the interest is paid to yourself and adds to the cash value of the policy. But a deeper look shows that the interest you pay yourself must be over and above the interest paid to the company, which is just another name for “premium.” The insurance company charges you interest regardless of the “interest” you pay yourself.

What happens if you don’t pay back the loan? The interest keeps compounding, adding to the amount of the loan and eating up the cash value of the policy. This could eventually leave you facing some nasty tax consequences, potentially including having to pay income taxes on phantom income.

Instead of paying that $12,500 a year in premiums, you could put it into a deductible 401(k) plan and invest the funds in a diversified portfolio. You’d even be better off to put it into a taxable account. Then if you needed a new car or water heater, you’d have cash and wouldn’t have to borrow from yourself or anyone else.

After spending hours researching “being your own banker,” my staff and I understand what BYOB really means. It stands for “Bring Your Own Bottle”—of pain reliever. You’ll need it for the headache of trying to understand that this is a slick advertising scheme. It makes no sense for anyone except those selling the life insurance policy.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

Posted in Consumer, Featured Contributors, Insurance, Investments, Rick Kahler, Saving MoneyTagged , ,