Market Recovery Program
It's legal, it works, and it's guaranteed!
Chapter 23
IN CONCLUSION
Okay, I’m convinced: the Market Recovery Program is real and it works! You’ve presented the reasons why it works as well as numerous examples and case histories demonstrating its successful application.
But you’ve also shown us an instance in which the Market Recovery Program is not appropriate for an individual or a given market loss situation.
Yes. You’re referring to Case Study #5 in which Peter and Jane wanted to recover market losses not for themselves but, rather, for their children and grandchildren.
I believe that the most important question determining suitability is to ask a potential participant: for what are the funds that you are anticipating transferring into this program intended? Let’s suppose that, upon questioning, we discover that the portfolio owner, like Peter and Jane, revealed that he doesn’t foresee needing income from the funds for either himself or, if married, his spouse during his lifetime. Instead, he has earmarked the funds for non-spouse beneficiaries such as children, other relatives, or charities after his and/or his spouse’s death.
In such circumstances, the Market Recovery Program is not appropriate. Indeed, there could even be a market-loss situation that was identical to Joe’s. Yet there is no need to benefit from a recovery during their lifetime exists. Instead, a clear instance of wealth transference is reason enough to consider alternatives.
Certainly, any funds remaining in the Indexed Annuity with Income Rider will become a death benefit for a non-spouse beneficiary, as discussed in an earlier chapter. Nevertheless, it is not, in my opinion, the best vehicle to transfer wealth from one generation to the next. In such instances, life insurance is often the most appropriate way to accomplish that goal.
Are there other instances in which the program would not be appropriate?
Cases of extreme market loss.
In this book we have used the example of Joe who lost quite a hefty percentage of his equity holdings -- 75% -- and have demonstrated how the Market Recovery Program can successfully recoup those losses for him. However, losses in the range of 85-95% cannot, as a general rule, be successfully recovered through the application of the financial techniques revealed in this book. Although it is not my place to speculate how someone could recoup such extreme losses, in such circumstances the best course of action may be to keep the funds in equities where the opportunity for extraordinary gains -- albeit with the downside risk of further losses -- may be the only possible way to recoup what has already been lost. Someone in such a circumstance should consult a financial advisor for professional advise.
In an earlier chapter we discussed how the owner of an Indexed Annuity has access to all his funds. If an individual foresaw the possibility that he would need to access all the funds at some point during the annuity contract, would this also be a reason not to participate in the program?
Yes…and for the reasons discussed in that chapter. Almost all annuities have provisions that penalize the owner for withdrawals of more than 10% of the account’s value in any year during the course of the contract. This can result in losses through surrender charges. Furthermore, large or complete surrenders would, in effect, be wasting the annual premiums an owner pays to participate in the 8% Income Rider. If a prospective participant foresees a good possibility of large surrenders during the course of the contract, it would probably be best not to go into this program in the first place.
The 401(k) and other types of qualified retirement programs are often cited in this book as sources for funds that can benefit from the Market Recovery Program. How easy is it to transfer funds from a 401(k) into this program?
It is beyond the mandate of this book to delve into this all-important subject. However, 401(k) transfers are becoming more and more common these days.
This is due to several factors:
1) employees with 401(k) programs want more options than those offered by their plan administrators. This is particularly true in light of recent market reversals. As such, investment vehicles such as the Indexed Annuity which provides features that protect the investor from downside market risk have great appeal. Thus, 401(k) participants are seeking ways to perform tax-free transfers from their plans into alternatives.
2) many employers have noted the unanimous March, 2008 United States Supreme Court LaRue v. DeWolff decision in which an employer was held liable for losses incurred by a disgruntled employee in his 401(k) plan. Fears of lawsuits have arisen and no one is quite sure what the fallout from the case will be. By offering employees other options than just the 401(k) the thinking is that this will avoid future liability.
3) there is an little known provision that, upon instruction by an employer, can be added to 401(k) plans. Called the “in-service, non-hardship withdrawal provision,” its inclusion would enable plan participants, under certain conditions, to make a tax-free transfer of funds out of 401(k) plans into other investments, such as the Indexed Annuity with Income Rider, while keeping the qualified, tax-deferred status of the funds intact.
You’ve used the term “guaranteed” quite frequently. How much can we, the readers, depend upon the guaranteed values you’ve described here?
The issuing and marketing of life insurance products is overseen by the 50 individual states’ departments of insurance. It is a heavily regulated industry often requiring state approval before such language can be employed by an insurance company.
If numbers or projections put forward in literature or advertising by an insurance company is not guaranteed, the usual language employed is “non-guaranteed values.” In this book I have attempted to be careful whenever using the term “guaranteed” to reflect the language used by the companies offering these products in the official literature they make available to the public. For example, the all-important Guaranteed Annual Payment schedule in the Income Rider provides precisely that: payments that are guaranteed to be paid out under the provisions of the annuity contract.
How did the Indexed Annuity with Income Rider come about as a market recovery tool?
Curiously, employing the Income Rider as a market recovery tool is an unintended consequence of what this financial instrument was originally designed to do, which was to provide an opportunity for retirees to maximize their income during their senior years.
In fact, even if it never became part of a market recovery strategy as described in this book, I believe the Income Rider was well on its way to revolutionizing the retirement market.
How so?
The Income Rider provides benefits to participants unlike anything that came before it. As such, I believe it deserves the description: The Third Wave in Retirement Planning.
What were the first two “waves”?
The first wave was the Defined Benefit retirement plan That was, basically, the pension plan our fathers participated in during their working days, pre-1980s.
Generally speaking, Defined Benefit plans work like this: employees would have a certain amount of their weekly salary set aside and put into a pension plan which would accumulate and compound over time. At retirement age, the worker would be trotted down to the Human Resources office and given several options, all of which were lifetime annuities. One option would always be a life annuity based only upon the soon-to-be retiree’s age and gender and, of course, how much he had accumulated in the pension plan account. The pension would end upon the death of the retiree regardless of when that occurred. And there wouldn’t be any residual amount left over even if the retiree died a week after starting his pension.
If married, another option may have been a joint life annuity based upon both the retiree’s and his spouse’s life. The periodic pension payout would continue until the second one dies. The joint pension amount would be of a lesser amount than under the single annuitant option. A third option may have been one in which the pension continued to the spouse if the retiree predeceased the surviving spouse but at half or 2/3rds the amount.
And that was it in terms of options. And, it is important to note, there was no residual amount or payments available to non-spouse beneficiaries. As well, the plan was irrevocable. Once chosen, that was it; the retiree couldn’t go back and choose another option.
The one nice thing about Defined Benefit plans was that they provided annual income that the participant was guaranteed never to outlive.
What was the second wave?
The Defined Contribution retirement plans. IRAs, 401(k)s, 403(b)s, etc.
Defined Contribution plans started in the late 1970s. Unlike the Defined Benefit plans, the employee actually gets to decide whether he wants to participate or not…and by how much (although there are limits). Thus, the emphasis on the word “contribution”.
Furthermore, the participant is able to distribute -- i.e. withdraw funds from the
BACK TO TABLE OF CONTENTS NEXT CHAPTER
---
