Stretching a monthly income to its greatest potential can be tricky. Social Security benefits are often one of the most reliable incomes a person or couple might have on a monthly basis. So what can be done to increase the benefits?

1. If you are single, it makes sense to wait until your full retirement age (usually age 66) to start claiming benefits unless you expect to die, or need the money sooner.

2. By coordinating start dates married couples can maximize benefits. If you, as the higher-earning spouse delay until the age of 70, your wife may receive and extra 32% plus cost-of-living adjustments. If you collect before the age of 66 your benefit and your wife’s survivor benefit will be reduced. However, if she waits to until her full retirement age to collect, she’ll get 100%.

3. Let’s say you would like to delay benefits until the age of 70, and you were the higher earning spouse. Your wife would like to collect, is older than 62, and would collect more with a spousal benefit than with her own record—but she can’t collect spousal benefits until you’ve filed. Here’s an idea: you file for your own benefit and your wife applies for the spousal benefit. You then immediately request a voluntary suspension for your own benefits. Your wife gets the spousal checks, and you earn a bigger benefit when you reapply later.

4. If you are at full retirement age, and want to claim benefits now, you might consider having your wife apply, while you apply for and collect her spousal benefits until you turn 70, in which case you then switch to your own higher benefit.

On January 1, 2010, the New Year brought the death of the estate tax. For one year. Sort of. The levy which has been in place since 1916 and in 2009 claimed 45% of the amount of estates exceeding $3.5 million expired.  What does that mean? Basically, Congress was unable to pass a new tax bill before the deadline.

If they are unable to come up with a solution, in 2011, the estate tax will rear a new, and ugly, side. As the law stands today, in 2011, just $1 million will pass to heirs tax free, and bigger estates will be hit with a top estate-tax rate of 60%. For now, in 2010, your inheritance is subject to extra-capital gains tax if you inherit more than $4.3 million.

Realistically, Congress will quickly, and retroactively, reinstate the federal estate tax in a form very similar to the law that applied for 2009—that is, with a $3.5 million dollar exemption and a rate of 45%. The exemption could be as much as $5 million, and the rate might dip to 35%, but Uncle Sam will most certainly want his cut.

The bottom line is that the vast majority of Americans will be allowed to die estate-tax free in 2010. If the laws are reinstated, which is most likely, some Americans might have a smaller tax bill if they die in 2010 than they would have had they passed in 2009.

CDRates are traditionally low; somewhere between 2 and 3%. What if you were able to earn 3 or 4 times that—lets say, in the neighborhood of 6 and 8%? You’d probably be interested. What if you were able to earn that level of interest, and also preserve the principal tax-free for your heirs? You’d probably be very interested.

The strategy is actually quite simple. A client purchases both a single premium immediate annuity (or a SPIA), and a life insurance policy. Because SPIAs are paying between 5 and 8% today, there is a significant gain in annual income based on the same principal amount you may have in a CD which is only earning around 2 or 3%. Some of the money you gain in annual income is used to pay for the life insurance policy, insuring that the money you have taken from the CDs to pay for the annuity is still passed on to your heirs—in the form of a tax-sheltered inheritance. The annual income from the SPIA has more than doubled the income potential for some of the clients that have been working with Cornerstone Financial Resources.

If you would like to find out how this strategy to boost your income while still insuring an inheritance for your loved ones, please call our office today to find out about our next seminar date, or make an appointment to sit down with Todd.

A 2009 Gallup poll recently indicated that only 42% of its participants still expect their 401(k), IRAs and other retirement savings plans to be a major source of retirement income—the lowest measure since the annual survey began, indicating that more than half of the nation’s retirees are looking for a safer plan for their retirement income.

For people of retirement age, or those planning for their retirement, fixed annuities may fit the bill, providing a dependable, steady stream of income. A fixed annuity is a contract with an insurance company that guarantees a fixed rate of return during the life of the contract. Payments can be structured to last for a specific period of time, or for the rest of the contract holder’s lifetime.

There are a variety of annuities available. An Immediate annuity, for example, requires a lump sum investment upfront, and payments start immediately. A Deferred Fixed Annuity can be attained with either a lump sum payment in the beginning, or a series of payments, with the contract beginning on a predetermined future date.

Income from these accounts depends on a variety of variables, such as the amount paid in premiums, the contracts rate of returns, the age, gender, and general health of the contract holder, and the number of years over which the income payments will be received.
Is an annuity right for you? Consider your situation. With almost unlimited products, it is important to understand ALL the features and liquidity access. If you need access to the money sooner than you expect, there may be unanticipated fees.
The down side taken into account, annuities provide a guaranteed income. The return, although not as attractive in a bull market, provides steady growth and are popular for those seeking safer avenues to grow their money.

The guaranteed income of a fixed annuity may help remove some of the uncertainty associated with retiring when the markets are fluctuating. There are a variety of options, and Todd Ehret will be happy to tell you more about them should you have any questions.

Cornerstone Financial Resources is pleased to announce it’s association with Sawtooth Asset Management. On October 27, the founder of Sawtooth Asset Management, Brad Pries, will be our guest presenter.

Brad has extensive experience in developing cutting edge investment strategies. Sawtooth is an Edina-based company that Brad has built from the ground up. Sawtooth employs a proprietary tactical investment strategy typically used by institutional investors. Brad will discuss why he feels the “Buy and Hold” thinking that may have worked in years past has room for improvement. Sawtooth’s strategy seeks appropriate market exposure in an effort to create positive gains while attempting to expose investors to less market volatility or risk. We encourage anyone and everyone with money invested in the market to join us for this event. For more information, or to reserve a seat, please contact Erin at our office by calling 507-433-3353, or emailing her at edickerson@cornerstonefrllc.com.

Arbitrage.  Many folks have no idea what the word means, or, more importantly, how you may be able to make money from the concept. Simply put, an arbitrage is exploiting a price variation.

For example, assume for a moment that I introduce you to a source that will loan you all the money you want, with no questions asked (O.K., this might require some imagination) and the interest rate that you’ll pay on your loan is 4%.  On top of that great interest rate, you get another guarantee:  the interest rate will also never go up (I said that this was an exercise in imagination, not reality). Now, assume that I introduce you to another source that will allow you to invest all the money that you want, and this source will pay you 6% interest on all the money that you want to invest.  On top of that, the rate of interest credited is guaranteed never to change.

Armed with that information, here’s my question for you:  Would you like to borrow all the money at 4% that you can and invest it at 6%?

The answer for many folks, is obviously ‘yes’.

That’s an arbitrage – taking advantage of a price variation.

The problem with many arbitrages is that they’re simply not that clean, neat, and predictable.  Many arbitrages exist one day and then evaporate the next.  There’s one arbitrage, however, that may be the proverbial exception to the rule.  That’s the good news. The bad news is that while this arbitrage will work well for some clients it won’t work at all for others.

Let me explain by giving you an example:

1.)    Chuck is 75 years old with an investment portfolio of bonds worth $2,000,000.

2.)    Chuck’s current average yield on this bond portfolio is 4.5%.  This means that Chuck is receiving investment income from this portfolio of $90,000 per year.

3.)    Chuck looks into a strategy that may allow him to increase his income from his investment portfolio and guarantee his heirs a tax advantaged $2,000,000 inheritance.*

4.)    Chuck uses his investment portfolio to buy a $2,000,000 medically underwritten, lifetime income contract* that pays him $285,480 annually for life. **

5.)    Chuck also buys a $2,000,000 life insurance policy to provide a $2,000,000 inheritance to his heirs completely income and estate tax-free.

6.)    The premium for the $2,000,000 life insurance policy on Chuck’s life is $121,000 per year.  Chuck will pay the premium from the increased income he’s receiving from his investments*.

7.)    By utilizing this strategy, Chuck will increase his spendable income and guarantee a tax advantaged $2,000,000 inheritance to his heirs.

8.)    Here’s Chucks situation both before and after an asset repositioning.

Arbitrage strategies are not suitable for all investors.  This particular strategy is designed for an investor who would not need access to the funds used to purchase the lifetime income contract and life insurance policy.

For more information on how this arbitrage might work for you, please call our office and set up an appointment to speak with Todd.

*The asset being illustrated here is a life insurance contract and the death benefit amount noted is guaranteed by the claims-paying ability of the issuing insurance company. The purchaser should consider the issuing insurance company’s credit rating when contemplating a purchase.

**The asset being illustrated here is a Single Premium Immediate Annuity and the income benefit is guaranteed by the claims-paying ability of the issuing insurance company.  The purchaser should consider the issuing insurance company’s credit rating when contemplating a purchase.  The identified strategy is an acceptable option when the retiree is certain that he or she does not need to withdraw any amount above the annual income amount at present or at anytime in the foreseeable future.