Do you have too much “Lazy Money”?
Watch my one minute video and read a short section of my newest book and see what you think. You can get your own copy on Amazon: www.MarksNewBook.com
Here’s a short section of my book for a little more information about “lazy money”:
What is lazy money? It’s money that is not earning its keep. Money that is actually losing purchasing power and that must work harder for you over the long term. The types of lazy money that comes to mind first are bank CDs, money market funds, savings accounts, plus T-Bills and 2 year Treasury bonds.
There are literally trillions and trillions of dollars of lazy money sitting in banks alone. According to Bankrate.com as I write these words, the best one-year CD rate in the USA right now is 1.26%. The best three-year CD rate is 1.66%.
And unless they are held inside of an IRA or similar account, that puny interest is taxable each year. You’ll get a 1099 tax form from the bank telling the IRS how much interest you earned… and then you’ll have to pay the tax.
In your mind, even forgetting about paying taxes on any interest earned, are those rates going to keep you ahead of inflation? Probably not.
I understand that the interest rates quoted above are for one and three year CDs. But what I have found is that many people just roll one CD into the next. They may change the term of the next CD, but as one CD matures, they just roll it over into the next one. I’ve seen retirees do this for 10, 15 and 20 years or more. Oftentimes, with $100,000’s of dollars in various CDs at multiple banks with multiple terms.
Now I always recommend my clients have a real emergency fund that is very liquid (within 24 hours) to cover most anything that would come up. Although each person’s situation and potential needs are different, I think, ten, twenty or even thirty thousand dollars would meet most folk’s needs. HELOC lines of credit on your home and unused credit cards also work well for emergencies.
You may recall that earlier in the book, I compared financial products and services to tools in a toolbox. Another analogy that I often use is to compare them to golf clubs. A putter has a specific purpose and so does a sand wedge and a driver. Even an amateur golfer knows when to use the right club for the right situation they face on the golf course.
There are a number of ways to make this lazy money work much harder for us – without taking unreasonable risks. The potential solution for one client may be very different than for another. Again, “the goal or objective” is the determining factor for which financial tool we use to best meet that goal.
I wrote earlier about having a one or two year CD alternative for emergency income when the markets are down, there are a few financial “clubs” that would be quite usable in this situation. Other financial clubs would be more appropriate for an LTC combo solution.
Here’s a specific example of a “utility golf club” – a financial solution that can solve a number of potential situations, while providing good access to your savings and liquidity.
Simon is a 65 year old in regular health (in fact, a doctor would likely say a few notches below that). Besides funds that he has already made available to his income allocation retirement income plan, he had just inherited just over $210,000 after his mother passed away.
He didn’t need income from these new funds, but wanted to give some to his four children ($14,000 each since this is the current annual gift tax exclusion amount), give $2,000 to each of his seven grandchildren, give a nice big charitable donation and take a wonderful two week trip to Europe with his wife Helen, plus add to his emergency fund.
So of the $210,000 or so, he gave $70,000 to his children and grandchildren, made a nice charitable donation, budgeted for his trip and asked me what to do with the leftover $100,000. Of a number of financial options presented, this was the one that they liked best. I’ll summarize it here for simplicity sake.
They put $100,000 into a single premium IUL life insurance policy. Based on his age and health, that bought him an $186,000 tax-free death benefit which was a nice perk, but he was looking for a pretty safe place to grow his money (and at least keep up with inflation), without any income taxation along the way.
This particular IUL is built for accumulation. It protects much of his single premium (or even increases it) should he need to access the cash in the policy during the first five years or so – depending on returns.
For his projections though, I only used an average index crediting gross index return of 6.5%. At just 6.5%, his cash value would grow from $100,000 to about $140,000 over ten years (net of insurance costs and all policy expenses).
That doesn’t sound great (in the first 10 years) at 3.4% per year (tax-deferred) net of all insurance costs, but according to bankrate.com, the best 5 year jumbo CD in the country now is 2.1% (taxable). A 3.4% tax-deferred interest is better than 2.1% taxable and the death benefit is always tax-free to the family.
By the way, the 10 year US Treasury bond is paying under 1.7% and that interest is taxable every year too – and there is NO tax-free death benefit. A 3.4% net rate looks pretty good.
Remember too, that his family is also protected by a growing $186,000 death benefit ($86,000 more than the premium he paid). At age 80, the cash value and death benefit should grow to about $185,000 and $250,000 respectively.
The cash value and death benefit should continue to grow and might become $315,000 and $370,000 respectively at age 90 (at 6.5%). And about $400,000 and $450,000 at age 95, and so on.
As a point in fact, based on his age and health, the cheapest ten year term life insurance policy would cost $800 a year for $86,000 of excess coverage over his initial premium. But that cost (an $8,000 value) is already included in the returns above.
Although this financial club is not a substitute for a life/LTC combo product, Simon does have the option to access part of the death benefit should he qualify for long-term care.
If LTC protection was the financial goal, we would have chosen a different product (financial club) that was specifically built for that purpose. The product is only an answer to a goal.
Of course, if leaving the largest guaranteed tax-free legacy possible to the kids and grand kids was the goal rather than tax-deferred accumulation without market risk, we would use different financial clubs or tools for that financial goal.
I could continue with many other little-known financial strategies that might be interesting to a small percentage of you. But let’s head for the finish line and wrap this book up.
You can read the whole book from Amazon: www.MarksNewBook.com