The Pitfalls of Wealth Management: Good Logic vs Bad Logic

1. The Pothole in Wealth Management Good Logic vs. Bad Logic

2. There are 24 more slides in this presentation which should take you seven to eight minutes to review.

3. Effective wealth planning should consider the following three issues: Real wealth involves sustainable cash flow; Income planning must include the impact of cash flow consumption on Net Worth and Wealth to Heirs . Most people are more concerned with running out of money than any other financial issue;

4. Matthew and Catherine Fox, age 65 and 60, have the following liquid assets available for retirement income: $ 600,000 Certificate of Deposit -- assumed yield: 4.00% $ 833,333 Muni Bond Fund -- assumed yield: 3.50% (mgt fee of 0.35%) $ 2,250,000 Mutual Funds -- assumed yield: 7.00% growth; 1% dividend (mgt fee of 0.80%) $ 750,000 Matthews 401(k) -- assumed yield: 8.00% (mgt fee of 0.80%) $ 900,000 Catherines IRA -- assumed yield: 8.00% (mgt fee of 0.80%) $ 5,333,333 Total Case Study Assume Matthew and Catherine want $200,000 a year in after tax retirement cash flow compounding by a 3.00% factor for inflation.

5. But first a pothole . . . Imagine that it is the first day of their retirement. They need to withdraw $16,667 (200,000/12). From which account should they take it -- and does it make any difference?

6. Efficient Distribution from Assets Least Efficient Order (Bad Logic) Lets withdraw the cash flow and compare the least efficient withdrawal order to the most efficient. 500,000 401(k) 900,000 IRA @ 8% 2,250,000 Equity Account 833,333 Tax Exempt Muni 600,000 CD

7. Source: Wealthy and Wise Liquid Assets should be prioritized so the pattern of cash flow withdrawals result in the highest possible long-range net worth. Liquid Assets should be prioritized so the pattern of cash flow withdrawals result in the highest possible long-range net worth. Most Efficient Order (Good Logic) 600,000 CD 833,333 Tax Exempt Muni 2,250,000 Equity Account 900,000 IRA 500,000 401(k) Efficient Distribution from Assets Least Efficient Order (Bad Logic) 500,000 401(k) 900,000 IRA @ 8% 2,250,000 Equity Account 833,333 Tax Exempt Muni 600,000 CD Lets withdraw the cash flow and compare the least efficient withdrawal order to the most efficient.

8. Note to Wealthy and Wise Licensees Select this menu item to maximize Net Worth: It is located on the Prioritize the Use of Assets sub-tab available under the Illustration Details tab in your Wealthy and Wise System.

9. Estate Tax Forecast In 2009 and thereafter, the consensus seems to be that the unified credit equivalent will likely remain at the 2009 level of $3.5 million ($7 million per couple) with a top tax rate of 45%. Calculations in this presentations use this level of taxation.

10. Wealthy and Wise licensees can find this estate tax option on the Estate Taxes sub-tab available under the Illustration Details tab while in Edit mode.

11. The Foxes' Net Worth* Good Logic vs. Bad Logic * After accounting for their desired after tax retirement cash flow. 52% Increase Source: Wealthy and Wise

12. The Foxes' Wealth to Heirs* Good Logic vs. Bad Logic * After accounting for their desired after tax retirement cash flow. 26% Increase Source: Wealthy and Wise

13. Good Logic provides financial room to include a gifting program for heirs. Well add a feature where the Foxes make annual gifts of $65,000 for 10 years to fund a $2,000,000 life insurance policy owned by an irrevocable trust.

14. The Foxes' Net Worth* Good Logic vs. Bad Logic vs. Good Logic + Gifts * After accounting for their desired after tax retirement cash flow. 3 vs. 1 13% Decrease Source: Wealthy and Wise

15. The Foxes' Wealth to Heirs* Good Logic vs. Bad Logic vs. Good Logic + Gifts * After accounting for their desired after tax retirement cash flow. 3 vs. 1 45% Increase Source: Wealthy and Wise

16. Including both income and estate taxes, the Foxes IRA and 401(k) are severely taxed at death -- up to 64% in some years. Lets examine the consequences if both of these accounts are donated to their favorite charities via a revocable beneficiary designation that takes effect only at the second of their two deaths. Well call this Strategy 4 . Since this only occurs at death, Strategy 4 has no impact on their Net Worth, or access to any aspect of it, while either of them is alive.

17. The Foxes' Net Worth* Good Logic vs. Bad Logic vs. Good Logic + Gifts + Charity * After accounting for their desired after tax retirement cash flow. 4 vs. 1 13% Decrease Source: Wealthy and Wise

18. * Strategy 4 Wealth to Heirs is increased by $2.8 million from Strategy 1. 4 vs. 1 25% Increase The Foxes' Wealth to Heirs* Good Logic vs. Bad Logic vs. Good Logic + Gifts + Charity Source: Wealthy and Wise

19. * If this couple has strong charitable motivations, these results are compelling. The Foxes' Wealth to Charity* Good Logic vs. Bad Logic vs. Good Logic + Gifts + Charity Source: Wealthy and Wise

20. Here is another way to look at it . . . Age 95/90 The gifts for the life insurance premium have been funded from assets, not their after tax retirement cash flow. Source: Wealthy and Wise

21. Most people are more concerned with running out of money than any other financial issue so . . . Each planning strategy confirms an acceptable level of after tax retirement cash flow and residual Net Worth. The Unique Logic of Wealthy and Wise Heres what happens if you do this . . . versus Heres what happens if you do that . . .

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23. Important Notice Examples and case studies are for illustration purposes, and actual results may vary. Legal and tax information is for general use only and may not be applicable to specific circumstances. Clients should consult their own legal, tax and accounting advisors to assist in the evaluation of any potential transaction or strategy.

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