Wealth Strategies: Investing for Your Retirement

Wealth Strategies

Investing for Your Retirement

Hunter William Bailey

Seventy-eight million baby boomers will retire soon. Some are prepared, but many will fail. You have to ask yourself, Am I prepared? and What could go wrong?

Being prepared means having much more retirement income than you can imagine needing. With the rising costs of health care, everyday living expenses, and inflation, your cost of living could double over the course of several years.

Do you have substantial savings, investments, and insurance programs to support your anticipated retirement years? Or could you lose everything you have from a frivolous lawsuit, long-term care experience, market losses, or unexpected emergencies? Taxes on retirement plans combined with estate taxes could severely reduce your estate for your loved ones.

Being prepared requires planning. Planning requires knowledge, and knowledge comes from reading this book, a compilation of the author’s thirty years of financial planning experience, investing, and assisting clients.

Aspiring Millionaires Publishing House

7509 Madison Ave. Suite 107, Citrus Heights, CA 95610

www.HunterWilliamBailey.com

www.WealthStrategiesBook.com

(916)863-1266 or (800)603-1393

Wealth Strategies: Investing for Your Retirement

by Hunter William Bailey

Copyright © 2009 by Hunter William Bailey. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, scanning or otherwise — without prior written permission of the publisher or author.

Ebook edition 2013

ISBN 978-0-9816268-1-9

LCCN 2008906673

Smashwords Edition

Other books by Hunter William Bailey

The Aspiring Millionaire: Financial Planning Made Simple Through the Secrets Revealed from Self-Made Millionaires

Design by Williams Writing, Editing & Design, www.williamswriting.com

Limit of Liability and Disclaimer of Warranty

While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book, and they specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Contents

Cover

Title Page & Book Description

Copyright & Disclaimer

Foreword

Introduction

Lesson 1: Understanding Your Feelings About Money

Identify your personal investing style.

Lesson 2: All Investors Must Have Goals

Categorize your priorities. Why follow someone else’s dreams? Learn how to develop a plan for day-to-day needs and tomorrow’s dreams.

Lesson 3: Active Investing versus Passive Investing

Should you become actively involved or should you focus on your career and pay someone else to manage your money?

Lesson 4: Managing Risks

Medical insurance, disability insurance, long-term health care options, fire & casualty, life and liability coverage . . . Without proper protection, you can lose everything you’ve worked a lifetime to achieve. Don’t miss this one!

Lesson 5: Estate Planning

Estate Planning Read about options for protecting your family and leaving your assets to your loved ones. Understand how to avoid probate and maintain estate value using prenuptial agreements, wills, durable powers of attorney, living trusts, and charitable trusts.

Lesson 6: Financial Basics

The principles of finance and investing: Be aware of how the world of finance and investments works.

Lesson 7: Investment Structures

This lesson will explain the structure and basic details of many widely utilized investments. Learn how to determine whether an investment is right for you and which investments may be most appropriate before and after retirement.

Lesson 8: Three Stages of Investing

If you have limited time to commit to investment planning, read this lesson and learn some important basics about where to invest and when.

Lesson 9: Maximizing Tax-Advantaged Investments and Strategies

Retirement plans, tax-exempt securities, or tax-deferred and tax credit investments? We will explore the different options available to help reduce your income taxes.

Lesson 10: Case Studies

See examples of personal financial plans for young, middle-aged, and retired investors. We will point out the different needs of various age groups. Special comments about layoffs and re-employment are shared.

Lesson 11: Buying a House

There is a right time to purchase a home, and a time to avoid this big-ticket item. This decision can affect your overall investment plan.

Lesson 12: Investing in Real Estate

Learn what it takes to prudently invest in real estate income property. Is being a landlord for you? We’ll look at the pros and cons.

Lesson 13: Employee Benefits and Retirement Plans

Take full advantage of employer-offered insurance and retirement programs. What should you do if you switch jobs or retire? Know the options available for your 401(k), profit sharing, employee stock option, SEP, or tax-sheltered annuity plan. Very important stuff!

Lesson 14: The Journey of Self-Employment

Determine whether owning your own business is your best shot at financial independence.

Lesson 15: Obtaining Investment Advice

How do you locate reliable and realistic investment advice? Learn who to talk to and what they stand to gain. You will find out how advisors, asset managers, and brokers are compensated, and decide whether to pay for advice or do-it-yourself.

Lesson 16: Investment Statements

We will look into the complex world of financial statements and try to make some sense out of what is supposed to be simple.

Lesson 17: Investment Prospectuses and Documentation

Understand the risks, internal costs, and management activities of an investment.

Final Comments

Put it all together! Here I will review some of the basics we have learned and add some closing comments.

Glossary

Resources

Disclosure

Acknowledgments

About the Author

Illustrations & Charts

The Four D’s

Asset Protection Review

The Results of $1,000 Invested over 20 Years

The Results of $100,000 Invested over 20 Years

Reduction of the Purchasing Power of $1,000 due to Inflation

Basic Asset Allocation Model

Asset Allocation, by Age

Airplane Turbulence: The Farther from Ground, the Less Worrying

Lump Sum Investment Methods

Layers of Supervision

Tax-Favored Investments

Rollover Steps

Financial Planning Strategy Checklist

Foreword

Few things truly worth having come easily or with no effort. Unfortunately, the human condition leads many to vigorously argue or deny this point. We want to hear that the right combination of actionable information will open the vault to untold riches or at least to consistent returns well above average.

Oddly enough, the less we are informed the more we are attracted to the idea of lightning in a bottle, the foolproof system, the killer application, or the winning ticket. State lotteries typically are considered a form of regressive tax on the poor and less educated. However, a 2004 Harvard University study* suggested that when jackpots increase substantially, the relationship between income and purchase behavior is less clear. As promised payouts grow, the ticket buyer base cuts across income and class lines. Turns out we may all be attracted to an address on Easy Street the more loudly it beckons us. As for actually winning the lottery, I know a bit about that and the unexpected side effects of random selection.

When Hunter William Bailey asked me to write a foreword to Wealth Strategies, I questioned my qualifications for the task. After all, I am not a financial advisor and owe no direct fiduciary duties to client investors. I eventually recognized that as a business associate and fellow author there were a few observations I could make to bridge the gap between those who manage others money and those simply trying to preserve and grow their own wealth.

My wife of fifteen years is a practicing attorney focused on securities litigation. At the end of often-long workdays, I routinely receive a dinner table education on poor or unethical money management and the tragic consequences for unwitting investors. One of these evening chats actually served as catalyst for my first book, Making the Big Game: Tales of an Accidental Spectator, a true story about my wholly unexpected last-minute trip to the Super Bowl made possible by a freak twist of fate.

Under some duress created by very short notice, I received transferred purchase rights in late January 2008 to two tickets to the Big Game. Financial and logistical complications affected a rapid series of decisions including many I made in the murky and less than transparent resale market for Super Bowl tickets. Rampant speculation and outright fraud were constant obstacles on the way to landing an upper deck seat for the New York Giants upset win over the New England Patriots. The experience not only inspired the book but prompted my researching the dynamics of the market for the most prestigious and coveted ticket in sports. In that research, I found a microcosm of the speculative forces and bubble psychology that drove much of our broader national housing and banking problems.

What impressed me about Bill’s approach was his dedication to basic fundamentals of sound and smart money management. Wealth Strategies contrasts considerably with a number of investment newsletters I receive and skim through every month. While I respect many of the money minds who produce insightful commentary on stocks, bonds, commodities, and macroeconomic trends, certain language and assertions made in these always urgent bulletins bother me.

The window of time to take action is always narrow, much like my Super Bowl ticket buying experience. The projected returns are always substantial. The opportunities are always limited to a narrow choice of a particular stock, sector, or financial instrument. From these narrows choices a hot list or sample portfolio emerges under the stewardship of the wise newsletter editor. He, or less often she, is invariably a guru who has appeared frequently in the financial press with sage advice and accurate calls of market surges or meltdowns.

Wealth Strategies takes a different path and returns the curious saver and investor to asking why in addition to what, where, and when. It provides basic financial education woefully lacking in our secondary schools and lost in the drumbeat of cable news crawls and horse race style reporting on the markets.

We do live in challenging and historic economic times. Rules of engagement with money are changing due to both market trends and government intervention. Once sure and safe things are now neither. In this environment, a deep breath and pause are warranted. Wealth Strategies is for those planning for a lifetime and not simply bracing themselves for their next quarterly statement.

Jeffrey Fekete, author of Making the Big Game: Tales of an Accidental Spectator

*Emily Oster, Are All Lotteries Regressive? Evidence from the Powerball (Harvard University, 2004).

Danger! Look Before You Leap!

A much younger me at age 17 executes a double pike front flip with half-turn — a risky feat even for an All-American gymnast with years of training. The lower photo is me doing the same double front flip with a half twist but off the high dive at the age of 56. Caution! Do you know what your advisor is up to?

Dear Reader,

This book is intended to provide basic information about financial planning, including details of specific investment vehicles, the stock and bond markets, and income taxes. Economic conditions will change, therefore the ideas presented in this manuscript should be considered generic in nature and not taken as specific, individual advice.

I say this because investing and financial planning is an individual practice. What is right for one person can be dead wrong for another. You may also hear or read the warning, Past results are no indication or guarantee of future performance. Most investment prospectuses will issue this warning.

The rationale for this type of warning is to prevent investors from investing their hard-earned funds into over-touted investments that may have experienced good performance in previous years but might be highly inappropriate for that investor. Because investors are emotional creatures, the Securities and Exchange Commission (SEC), a government agency, attempts to protect investors from overzealous investment salespeople and companies.

So I must advise you to seek professional advice to determine which parts of this book relate to your situation. You should always research as much as possible before investing your money in any venture or product. Carefully read a current investment prospectus before actually investing. You should consider speaking to a specialist in areas such as investments, insurance, banking, real estate, wills, trusts and retirement plans, if one is available.

The general advice given within this book is intended as an educational aid. Individual advice is inappropriate without having specific information regarding your particular situation. You should also seek objective, expert opinions from people who have no ax to grind.

For regulator research and information contact these two regulatory agencies:

Financial Industry Regulatory Authority (FINRA) (301) 590-6500, www.finra.org

Securities and Exchange Commission (SEC) (800) SEC-0303, www.sec.gov

Hunter William (Bill) Bailey, CFS, MSFS, graduate of American River College and California State University–Sacramento, former All-American gymnast, author, radio talk show host, independent financial advisor

Introduction

Success does not come about because you made the right investment, or invented the next big thing, or inherited family money, or even won the lottery. Success comes from deep inside you. Yes, you! It’s the burning desire to create and implement your personal goals and pursue your own personal financial strategies. Making money is not the only process you must accomplish. You must develop a strategy to conserve what you create, especially if you are already retired. This strategy includes the financial basics of budgeting. Yes, budgets! I don’t care how much money you make; it’s how much you keep. With expenses, taxes, and inflation emptying out your purse, holding onto what you make becomes a major challenge.

Many people spend money and worry about the consequences later. I’ve interviewed many would-be investors who started when their best opportunity for investing had already passed. The amount of their current income available for investing just wouldn’t be enough to meet their retirement needs. This is a wake-up call to those of you who have not yet begun to plan. Get started now!

In this book you will find some of the different techniques for establishing a viable lifelong investment program. You will also be given tools to ground yourself in the reality of an investment and not be misled by all the sales hype in the marketplace.

You will learn important elements necessary for effective personal financial planning. I will give you this information with the hope that you will use it in a responsible manner and not expect insider information in order to cheat the system and get rich overnight. Although the advertisements out there make us feel that we’ll miss the boat if we don’t buy what they’re selling, this book will help you to slow down, catch your breath, and plan for the long run.

There will be long-term investments suggested for most investors that include risk, which may be reduced by a variety of investment strategies. If you are already retired, your decisions are especially critical, as mistakes can be costly and there is no time for do-overs.

The stock market crash of 1929, the oil market crisis in the mid 1970s, the real estate recession of the early 1990s, the high tech crash in early 2000, and the 2008 crash all followed an investor’s buying frenzy. The markets were up and the buyers were lined up to buy. Everyone seemed to be an expert. Many chose to buy because they expected predictable gains. Some walked away with all of the money, and others walked away with empty pockets and a bad taste in their mouth. Had these investors received proper advice, they would most likely have been properly diversified and practicing the defensive investment strategies that we’ll review right here in this book. Although diversification is not a guarantee against the risk of loss in a declining market, it may help reduce the volatility of your overall portfolio.

You see, successful investing is not only about investments. It’s about getting in touch with your own risk tolerances, investment patterns, available personal resources, and personal goals. From there, you need to map out an investing strategy that makes sense for your own situation, not someone else’s. Your plan should be one that will last a lifetime, changing only as your situation changes or as new investment opportunities become available.

You are going to learn about some critical areas that desperately need your attention. And you will determine those areas where the advice or assistance of a professional may be necessary. We will tie together a great deal of information into a comprehensive whole plan.

In this book, we will cover topics like:

Cash management

Risk management

Investing during retirement

Insurance

Estate planning

Employee benefits

Retirement plans

Retirement plan rollovers and early payouts

Money market mutual funds, mutual funds, and exchange-traded funds (ETFs)

Stocks and bonds

Annuities

Limited partnerships

Real estate

And much, much more!

There are several books in print offering excellent advice when it comes to investing and personal financial planning. The secret to successfully utilizing the information available is to make it relevant to your own situation. If you’re a do-it-yourself person, I suggest you learn as much as you possibly can. The level of knowledge you acquire could be the difference between financial success and costly mistakes. If you choose to use an advisor, the time you spend educating yourself will make you a knowledgeable and well-informed client.

This is not an adventure book offering inside information or quick answers that will make you rich overnight. Many self-made millionaires follow a process over time. This book gives you the tools to get you started and on your way to financial success and prosperity. I sincerely hope you find it helpful and of course profitable!

I will, throughout the lessons, share with you my own personal experiences in investing. No, I didn’t attend Harvard; my wisdom has come from life experience. My success has been accumulated over the long haul. My first million dollars of net worth was made up of illiquid real estate assets, business property, and retirement plans. Not glamorous and relatively risky, but my investments helped to provide for the growth and diversification of my portfolio, and they taught me some very valuable lessons.

Did you know that for every $400 per month you require in income, you might need to have about $100,000 invested?

Think about that! Unless you have a guaranteed retirement, a million-dollar portfolio becomes average. If you have $1,000,000 invested and earn, let’s say, 5% interest income, those earnings will give you around $4,000 per month.

So let’s get going — there’s a lot to learn!

Lesson 1

Understanding Your Feelings About Money

My son, Nashoba, as a baby. Surely he’s not worrying about his investments already?

Like most of us, you probably find yourself worrying about money. You may wonder if you will have enough to meet your financial obligations. Actually, everyone I have ever known has, at one time or another, been concerned about finances.

What is it about that rare person that allows him or her not to have that sinking feeling or not to be full of fear about the future? Why is it that some people start from nowhere and are able to put together money and make great deals, while others never seem to be able to do anything? What is it that keeps us from surging forward away from the shadows of uncertainty in quest of our financial dreams?

Much of what holds us back is fear. Sometimes we are so afraid of failing that we never try. Since childhood, we have been taught that failing is bad. We don’t take risks or chances simply because we’re afraid that we may not succeed. We may have feared the day our school report card was delivered, not wanting that unacceptable grade that would separate us from the rest of the class. This separation can lead to a fear of abandonment. When we fail to meet the expected norm, it increases our desire to want to be included. Can you imagine being congratulated because you failed your exams, were just terminated from your employment, or had to declare bankruptcy? A fact of life is that you do not receive positive feedback for your failures.

George Hunter & Pearl Hunter, 1943, Minot, North Dakota

My grandparents raised their family during the Great Depression. After the stock market crashed, many corporations went bankrupt, some banks closed, and unemployment rose to an all-time high. As in 2008, investments in stocks and bonds were down but not out. Some banks, however, completely failed but were allowed to survive with help from the government, hence the word bankrupt.

My parents were teenagers during the Great Depression, a time when the stock market crashed, many corporations went bankrupt, and some banks closed. Unemployment was at an all-time high. Many people lost their jobs. Farmers who used credit to finance their farms often felt that committing suicide and leaving their family with the funds from the life insurance proceeds was the only way to pay back the mortgage, hence the expression, He bought the farm. Some people who survived the Great Depression came away scared and humbled. They feared nearly every investment opportunity that passed their way.

After World War II, when my mother’s first husband was killed in combat, my mother received $5,000 from his life insurance policy. Her brother approached her with an investment idea. He showed her a lot for sale at a resort called Lake Tahoe. At the time, the lot sold for only $400. Rather than seeing the lakeside lot as an investment opportunity, my mother only saw brush and weeds. That same lot today would sell in excess of $1 million. She, like many Depression-era survivors, knew only to take the safe way and avoid risks.

With their early life experiences firmly ingrained in their memories, my parents stifled their creative ideas and entrepreneurial abilities. My father settled for his safe job with the federal government. He spent over 30 years with the government as a civilian painter, only to die during his first year of retirement from a stroke brought on by failing lungs. (His illness was typical of people who’ve worked around paint solvents for many years.) My mother spent her life as a housewife and mother, unknowingly passing many of her fears and negative life attitudes to her children. I grew up with a limited ability to take risk. It was difficult for me to reach outside my own negative attitudes and think positively.

It is, however, important to have a forceful and positive attitude. Once you achieve this, everything else in life can fall into place. Choices and opportunities should abound. With a little thought and research, making appropriate choices can put you in a strong and positive position, enabling you to take life’s journey along the road of prosperity.

After many discussions with self-made wealthy people, I’ve realized that they tend to be or do all of the following:

They tend to be doers with a great amount of self-motivation.

They possess the virtues of reliability and integrity.

They express a positive attitude throughout their ventures, even when things seem gloomy.

Their willingness to accept new ideas and try new concepts places them apart from those who have no vision.

They possess the ability to delegate authority, allowing them to maximize their overall effort.

They tend to make sure they have all the facts before taking on a new venture.

At retirement they remain fully invested and allocate accordingly. They have learned to ride the market.

The final and most important characteristic I’ve observed is that they keep track of their assets. They have a vision and plans for the future, no matter what stage of the game they are in.

These individuals really think about what they are doing and what they want to accomplish, and they create a basic strategy or game plan that will get them where they want to go.

With your financial goals in mind, evaluate the quantity and use of your spare time. The amount of spare time you have is an asset in itself. Any additional time you have each week can be used to improve your chances of making money by working an additional job, improving your educational qualifications, taking up an income-producing hobby, or learning to manage your money yourself.

An eye-opening example of how different approaches to life affect the quality of our lives is our very own high school reunion. Years later, some have failed, but most are adequately surviving. The few who were always striving, even back then, are most likely to have accomplished those wonderful dreams that many of us only fantasize about.

The ultimate goal is to achieve financial successes along with a happy life. Get in touch with whatever personal shortcomings you may have developed, whether they came from your childhood upbringing or are just unwanted personality traits. Some of us have compulsive spending problems; some are compulsive savers who never take risks; and others simply don’t know what their financial options are. As you may know, being financially successful is not determined by having high income; one must learn to manage one’s own finances.

Conservation of capital is just as important as the accumulation of wealth. There are thousands of people in business who are constantly creating ways to part you from your money. We all have heard stories of how someone was swindled out of their life savings and how they refused afterward to ever take a risk or to venture out again. Or maybe you know someone who attended a seminar promising amazing wealth for almost no effort, spending hundreds