Bert Salazar, Managing Member  Longevity planning has become the biggest issue for Americans in the 21st Century ! This white paper addresses the many challenges facing retirees and/or pre-retirees today and in the future - Along the way, it provides plausible solutions that mitigate and offset the obstacles of traditional retirement planning for the vast majority of Americans.

C a m b r i d g e F i n a n c i a l P a r t n e r s , L L C 2 0 0 0 P o n c e D e L e o n B o u l e v a r d , S u i t e 5 0 0 C o r a l G a b l e s , F L 3 3 1 3 4

 

Retirement Issues and Concerns in the 21st Century

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Retirement Issues and Concerns in the 21st Century

By Bert Salazar, Managing Member

Cambridge Financial Partners, LLC I. Introduction

The 21st Century is full of challenges and opportunities, and now, more than ever, Americans need to address, study, investigate, promote, and act upon the many issues facing retirees today and into the future. In this white paper, I will address and bring to the forefront the retirement dilemma that the United States is facing today, along with a synopsis depicting ways to potentially avoid and mitigate many of the retirement issues and concerns that will critically impact a viable and comfortable retirement.

II. Retirement Challenges Due to medical technology and health awareness, Americans are living longer today than ever before. According to all statistical data relating to retirement planning, longevity living has become a major phenomenon in the United States and for most industrialized countries throughout the world. Although all 92 year olds wish to live to 93, living too long poses unintended consequences that most retirees fail to acknowledge and/or understand. In reviewing the statistical data provided in reference to longevity living in the United States and many parts of the world, one of the biggest concerns for retirees and public assistance programs deals with quality of life – yes, what used to kill us 30 or 40 years ago may not be killing us today, but it is leaving us with major disabilities or care-given alternatives that are quite expensive from an economic and family-related standpoint – how much will the care cost? Where will the care be provided? Who will provide the care? Who will pay for the care in the future? What impact will this care have on close family members? Focusing primarily on the risk management process while mitigating the four major risks that Americans are facing today makes our firm a unique organization in the Florida marketplace. As a risk manager and Economics advisor, I focus all efforts in protecting our individual and business clients from the risk of dying too soon; living too long; living with a disability; and last but not least, living with eroding factors. Since this white paper is about retirement issues and concerns in the 21st Century, I will be focusing on the risks of living too long, living with a disability, and living with eroding factors. As previously stated, living too long creates unintended consequences that are a wreaked/havoc for American families – This is the first time in American history that a generation has reached adulthood with more parents

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living than children – the so called sandwich generation is still raising children while providing and caring for parents. According to the 2000 Annuity Tables, Society of Actuaries, here are the projections for life expectancy in the United States:

Life Expectancy Table

50% 25% 10% 1% Male Age 65 85 91 97 105 Female Age 65 88 93 98 106 M/F Couple Age 65 91 96 100 107

As you can see from this table, there is a 50% probability that a couple age 65 will have at least one person living until age 91, and a 25% probability that one of them will be alive at age 96 – For obvious reasons, attempting to not run out of money before someone runs out of life is a tall order to accomplish – before I address some of the hybrid solutions available, it is critical to understand the problem in its entirety. If people understand the Why of certain decisions they make in life, they will never challenge the How or question the What! During working years, taxation, inflation, and market losses are the biggest nemesis to successful retirement planning. During retirement years, taxation, inflation, and market losses risks are intensified, but it does not end there…outliving assets, inadequate income for surviving spouse, and health care costs dramatically change the family economic environment. Living with a disability causes significant challenges to middle and upper class Americans in the United States. As previously mentioned, the cost of care and additional impact on family members makes providing for long term care a “must” component in planning for retirement. According to statistical data, the cost of nursing home facilities in the State of Florida exceeds $87,000 annually1, and as high as $93,000 annually in other parts of the country – please bear in mind that said cost represents 2015 cost of care, and said expenditures in the area of long term care increase by approximately 6% to 8% annually. For said reasons, insurance carriers have developed long term care insurance in order to assist consumers with this costly liability in the future, but since long term care and longevity living is such a new phenomenon, most carriers are having a difficult time pricing these products properly. Hence, a number of carriers have had to leave the marketplace altogether, while others continue to increase the cost of existing contracts. From a consumer standpoint, the cost of long-term care insurance along with the opportunity cost lost if said consumer passed away without the need for long term care can in fact be a significant dollar amount. The use it or lose it approach to long-term care forces Americans to look elsewhere for other options. As a risk manager, I

                                                                                                               1  Genworth Cost of Care Survey 2015

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take the position that if a client gets what he/she wants, it should not cost them any money whatsoever. In other words, dying on the side of the angels without any need for long-term care should be something to celebrate and not something to despair about since the long-term care policy went unused. Certain carriers have life insurance and/or annuity chassis that provide long term care riders (not long term care) that allow the consumer to invade death benefit face amounts and/or annuity cash accounts in order to pay for qualified long term care expenses. These types of products allows the consumer and immediate family members to always receive a benefit from said contracts thus recapturing loss opportunity costs previously lost in traditional long term care policies. As part of retirement planning calculations and discussions, Americans need to pay attention to the 10 major eroding factors that violently attack our wealth on a daily basis2: Eroding Factors Eroding Factors 1. Taxes 6. Stock Market Declines 2. Inflation 7. Interest Rate Declines 3. Loans and Interest Charges 8. Technological Changes 4. Financial Expenses 9. Planned Obsolescence 5. Loss Opportunity Costs 10. Law Suits

To all of these we must add the cost of health care in retirement. The majority, if not all of the clients I engage in my practice on a regular basis have never considered the impact and cost of health care during retirement years – According to Fidelity Investments3, the out of pocket expense for the average 65 year old couple can reach $220,000 in 20 years. Although Medicare Part A (Hospital Insurance) does not carry a cost, Medicare Part B (Medical Insurance), along with Medicare Part C (Medicare Advantage) and Medicare Part D (Prescription Drug) not only carry a monthly premium, but also carry deductibles and other non-covered expenses. Today, the average American couple pays approximately $7,874 annually in premiums not including deductibles and other expenses4. Monthly Annual Medicare Part A $0 $0 Medicare Part B $104.90 $1,258.80 Medicare Part D $37.20 $446.40 Medigap Plan $186.00 $2,232.00 Total per Person $328.10 $3,937.20 Total per Couple $656.20 $7,874.40

                                                                                                               2  Lifetime Economic Acceleration Process (Leap) 2005 Leap Systems, Inc. 3  Fidelity Investments, “How to tame retiree health care costs”, May 2013 4  Medicare 2014 and 2015 costs at a glance. http://www.medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-a-glance.html

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III. You ’re on Your Own Over the past 35 years, reductions in corporate retirement benefits have diminished significantly in the United States. In the early 80s, employers began to shift away from traditional defined benefit plans to traditional contribution plans due to increased cost of benefits and the surge of the United States stock market. A defined benefit plan and/or pension plan places the risk and liability of retirement income benefits on the employer since they are required to provide a guaranteed retirement benefit for life. On the other hand, defined contribution plans place the risk and liability of retirement income planning on to the employee for life. Not only is the employee now required to calculate his/her own retirement needs, but they must also calculate contributions, rates of return, risk management, longevity planning, and expense management along the way. This transitionary process and retirement benefits shifting created unintended consequences for today’s baby boomers – for example, most Americans are making dismal contributions to their retirement plans until late in life, and therefore, they have lost the compounding effect of assets on the Exponential Curve thus never reaching its full potential. We only have one life to live, and one Exponential Curve for the growth of assets and retirement benefits. Time provides the biggest bank for your money since it takes years for assets to grow exponentially in a volatile and/or fixed environment. Stock market and interest rate volatility have created a tremendous amount of chaos for most retirees in the 21st Century. Most Americans and financial advisors calculate rates of returns on a linear basis, and they forget that the sequencing of returns are more important than the actual return – for instance, retirees in the United States lost billions of dollars during the stock market and real estate corrections of 2000, 2001, 2007, 2008, and 2009. The reason for these losses in account values, account statements, and overall wealth was due to the fact that the rules of engagement are totally different between accumulation and distribution – prior to retirement, it’s all about risk and the accumulation rate; during retirement, it’s about risk and the distribution rate. Moreover, stock market and interest rate corrections during working years show up as statement losses, but during retirement years, they show up as actual losses because said retirees must continue to take income from accounts that are also losing a tremendous amount of value during corrective years – this action can reduce retirement assets significantly in a few short years. The Trinity Study5 was conducted several years ago in order to study and address the “safe withdrawal” rate in retirement for Americans – this study took into consideration a number of issues including the sequencing of returns previously discussed – it basically states that taking more than 4% annually from retirement assets can have adverse consequences on longevity planning. As a student of Economics for the past 40 years, the Loss Opportunity Cost concept possesses the most difficult challenge for Americans and traditional retirement planners to understand. America is a country of wants versus needs; a country of luxury versus standard; a country of living for today versus planning for tomorrow – the wealthy make decisions based on the next several generations; the poor make decision based on Saturday night. Loss Opportunity Cost deals with the best next decision that can be made on a single item or purchase decision. In

                                                                                                               5  1999, Association for Financial Counseling and Planning Education  

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our country, every buying decision we make involves financing although most people think that by paying cash they are avoiding all aspects of financing. In Economics, the majority is always wrong, and when it comes to financing purchased items, we must remember the following: Everything in America is financed – you’re either paying interest to someone else for the purchased item, or you’re losing interest on your money by paying cash – and that forgone interest is added as a loss opportunity cost to the actual cost of the purchased item. According to Albert Einstein, “compound interest is the 8th wonder of the world…those that understand it earn it; those that don’t pay it!”

In the process of client engagement, I discuss three types of wealth with my clients that most financial advisors will not address:

Accumulated Wealth, Lifestyle Wealth, and Transferred Wealth are seldom understood by most of my clients and the majority of Americans today – many of my competitors only discuss Accumulated Wealth because it is readily available, and because it is where they make their money. Accumulated Wealth is simple to understand; it is all the stuff consumers have (savings, investments, real estate, 401k values, IRA values, etc.). Lifestyle Wealth is challenging at best, and most consumers do not have the ability to make financial corrections and/or reduced expenditures for the long term (needs versus wants, wishes versus desires, and keeping up with the Jones’ gives financial advisors very little to work with when trying to reduce current expenses while maximizing retirement assets in the future) – think of it this way…we know that diet and exercise are the two most important components of a healthy living, yet 2/3 of all Americans are heavy and morbidly obese…why? The answer is simple – Americans are not willing to sacrifice a small amount of their current lifestyle in order to secure a better life in the future. Transferred Wealth, on the other hand, is where I do the best work with my individual and business clients. In the type of work I do, I concentrate on recapturing the loss opportunity costs for my clients in areas of Transferred Wealth that they didn’t even know they were giving away (term insurance cost, automobile and homeowners insurance deductibles, along with automobile and real estate financing, fees to financial institutions, taxes and the servicing of current debt). Many of my clients know how to make money, but they don’t know how to create wealth, and I deal with many sophisticated clients, attorneys, CFOs, and CPAs.

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Understanding banking, financing, and interest volume versus interest rate are by far the most important facets of creating wealth, and you notice I am not talking about rates of returns, products, and/or specific services.

IV. Lack of Financial Education for Americans During the perfect storm of 2008, the Obama Administration conducted a financial overview of federal employees, and the reporting agencies agreed that most federal employees were not ready for retirement even with a guaranteed pension, Social Security, and the Thrift Savings Plan. For this reason, President Barack Obama signed into law Executive Order 135306 which focused on financial education for federal employees and all Americans. For several years, I conducted numerous educational workshops for federal employees throughout the United States – These workshops included the following federal agencies (FBI, DEA, Customs, DHS, NCIS, ATF, ATC, Social Security, Secret Service, and clerical employees) – these workshops were primarily designed to cover federal employee benefits and overall financial planning assessment. These federal employees were punctual, eager to learn, but seldom capable of implementing strategic planning due to their lack of knowledge in finances and economics.

V. U.S. Economic Challenges As many Americans are gearing up for retirement and longevity planning, the U.S. economic challenges will play a major role in whether these Americans will reach and/or attain a comfortable retirement in the foreseeable future. For example, the U.S. National Debt is currently at $19 trillion7 and counting! In 2015, the U.S. spent $223 billion, or 6% of the federal budget, paying interest on the federal debt8. According to the Social Security Board of Trustees, Social Security will become insolvent by 2033 unless Congress makes major changes to its current program – some of those changes may include the link of cost of living increases to different inflation indexes, increasing full retirement age to 67, increasing or eliminating wage cap for payroll taxes, increasing payroll taxes, or a combination of all these options9.

                                                                                                               6  Executive Order 13530 – President’s Advisory Council on Financial Capability, January 29, 2010 7  U.S. Debt Clock.org 8  Fix the Debt – Info@Fixthedebt.org 9  2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds  

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In addition to Social Security issues and concerns in the 21st Century, Medicare and Medicaid issues are much worse – the unfunded liabilities for Social Security, Medicare, Medicaid, Medicare Part D, and ObamaCare (Affordable Care Act), exceed $100 trillion dollars!10 The U.S. Debt Clock shows that each tax-paying American owes the government $161,651 today just to cover the national debt – on the other hand, each tax-paying American owes $858,668 today to cover the unfunded liabilities previously discussed. Who owns the $19 trillion debt ? U.S. owns 53% of the debt; foreign governments own the remaining 47%.

Since these numbers appear so farfetched to most Americans and the majority of my clients, let me explain the difference between $1 million, $1 billion, and $1 trillion in simple terms – one million seconds ago was 12 days ago; one billion seconds ago was 32 years ago; one trillion seconds ago was approximately 32,000 years ago, and humans were not roaming the earth – do you get it now? Do you see why political pundits refuse to address and/or acknowledge this problem on either side of the aisle – Where do you think taxes will be in the future? Higher, lower, or will they remain the same? David M Walker, CPA Comptroller General of the United States and former head of the General Accountability Office (GAO) stated that “based on current fiscal path and economic policy, future taxes will have to double or our country will go financially bankrupt”11. Moreover, by the year 2020, 92 cents out of every revenue dollar for the U.S. government will go toward Social Security, Medicare, Medicaid, and the interest on the national debt – Again, where do you think taxes will be in the future? As a footnote, the average marginal federal income tax bracket in the United States has been 62% since 1926, and the top federal income tax rate never went below 70% from 1936 to 1981.

                                                                                                               10  U.S. Debt Clock.org  11  The U.S. Deficit and Debt – David Walker in, Comeback America 2010

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VI. You Can ’t Get There From Here For most Americans, time, savings, and accumulation rates will not be sufficient to maintain an adequate retirement for a period of at least 20 years on the short-end, and as long as 30 to 35 years on the long-end. The reasons are many, yet the solutions are few – the U.S. is a spending economy, and this creates critical challenges for baby-boomers and many of the generations that follow – the average savings rate for Americans has been 2%, and for a number of years, this number has been less than zero12. Due to the failure of traditional financial planning, Americans have been chasing returns while dealing with the stock market rollercoaster. Remember, when you pay cash, you are borrowing from your past savings; when you finance, you’re borrowing from your future earnings. What’s your number? A famous commercial most of us have seen on TV, and that’s why traditional financial planning has created failure and a false sense of security for millions of Americans. Why? Because financial planning uses simple calculations that most 10-year olds can perform without any type of financial knowledge. Financial advisors ask their clients how much money they will need in retirement (like if anyone would know), what rate of return (ROR) they wish to obtain, how much risk are they willing to take (higher the risk, higher the reward nonsense), and how much money can they afford to contribute. Instinctively, financial advisors pull their financial calculator and use Wealth = Money x Rate x Time, and there you go…financial planning 101! For obvious reasons, there are major problems with the above solutions technique I just described. Although I have simplified this process for argument sake, this is pretty much how it is done in the traditional planning world. Linear rates of returns are always used, and sequencing of returns discussions are almost always avoided. Since no one can predict a future outcome, discussions on opportunity costs, recapture of certain fees and/or services, health care costs in retirement, future taxes and inflation, planned obsolescence, and other major eroding factors are placed on the sideline and seldom brought to the surface. As I stated at the beginning of this white paper, distribution rates are by far the most important part of retirement for most Americans. Since you don’t want to run out of money before you run out of life, all financial planning decisions are made with a scarcity view of the world. Therefore, with no economic planning in place, Americans will have to live off the interest that their investments generate on an annual basis, and as investments under-perform, their distribution rates will suffer. The Trinity Study13 depicted the success of certain distribution rates based on different periods and different portfolio models – in this study, a 3% distribution rate worked well for 15, 20, 25, and 30 year distribution periods – in other words, the portfolio was deemed successful if there was a terminal value of ($1) at the end of a given period.

                                                                                                               12  The Decline in Savings – Barry P. Bosworth, The Brookings Institution 2012  13  1999, Association for Financial Counseling and Planning Education  

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Due to increased market volatility and sequencing of returns annual experiences, a less than 3% distribution rate may be necessary. A $1 million portfolio may generate $30,000 of annual income without invading principal and gross of taxes and inflation (not really a lot). Financial institutions, on the other hand, use these prescribed distribution rates to their advantage by utilizing 4 major rules that are ever present in their quest for maximum profitability and success. Since we have to deal with financial institutions on a regular basis, it is paramount for all of us to consider and understand how the game is played. Here are the Rules of Engagement for financial institutions14:

1 . They want your money 2. They want your money systematically 3 . They want to hold on to your money for as long as possible 4. They want to give it back to you as little as possible

As these financial institutions proceed to create products, services, and other items of importance in their inclusive annual business plans and forecasts, they keep the above Rules of Engagement vividly in their minds – Just about every decision they make is based on the above-depicted premises, and their profits keep on coming on an ongoing basis. These rules are not only followed by financial institutions, but they are also followed by the government and major corporations – every single one of these entities wants a piece of us, and unless we learn the rules of the game and the rules of engagement, we will find ourselves in dire straits or in international waters on a dingy with no paddles.

                                                                                                               14  Lifetime Economic Acceleration Process (Leap) 2005 Leap Systems, Inc.  

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I. The Four Major Destructive Risks As an Economics Advisor, I specialize in managing the most critical risks that are affecting Americans today and in the future. By managing and addressing these risks, I provide a sound, holistic, and telescopic view of my clients’ financial worlds. Clients no longer need to concentrate on all facets of planning because our investment and insurance models look at every money move in relation to The Four Major Destructive Risks:

1 . The Risk of Dying too Soon 2. The Risk of Living too Long 3. The Risk of Living with a Disability 4. The Risk of Living with Eroding Factors

In an upcoming white paper, I will devote the entire writing to addressing these four major destructive risks, but for now consider the following: If every financial move and/or decision you make centers around the impact that said move will have on the overall economic model in reference to the above-mentioned 4 major risks, then your overall financial plan will be sound, structure, and flawless from a decision making perspective. Since we don’t live in silos, Americans cannot escape outside financial influences that may have positive or negative impacts on their everyday planning. Our economic models address each of these challenges objectively and soundly through our Lifetime Economic Acceleration Process (Leap).

II. What is Lifetime Economic Acceleration Process (Leap) The Lifetime Economic Acceleration Process (Leap) theories and techniques were devised over 35 years ago by Robert Castligione, former owner and CEO of Leap Systems. With an Economics degree from New York University along with several years of financial services experience, Robert Castligione set out to address and classify the major problems that Americans were facing in the early 80s and how traditional financial planning was doing a dis-service when providing viable solutions to specific problems. The Leap Model is divided into 3 major components, and each component has 9 sections15:

                                                                                                               15  Lifetime Economic Acceleration Process (Leap) 2005 Leap Systems, Inc.  

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Each 9 section is economically placed in the model from top to bottom, and left to right – Since each component has 9 sections, these sections include all possible products and services that can be acquired in the United States – The layers of products and/or services are then analyzed and placed in the model as one-dimensional, two-dimensional, or three-dimensional. For instance, in the Protection Component, vehicle insurance, property insurance, and liability insurance are deemed one-dimensional (they protect assets); disability insurance, medical insurance, and government plans are deemed two-dimensional (they protect assets and income); and wills and documents, trust and owners, and life insurance are three-dimensional (they protect assets, income, and life). Moreover, section importance increases as you move top to bottom, and left to right. The same process applies to the Savings and Growth components.

Leap Protection Component: Vehicle Insurance Property Insurance Liability Insurance Disability Insurance Medical Insurance Government Plans Wills & Documents Trust & Owners Life Insurance

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The other components in the model include:

The Debt Management component provides a structured debt view, annual servicing of said debt, and years remaining to satisfy and/or retire the debt. The Cash Flow component allows our clients to see inflows and outflows of revenues in and out of the model in a micro and macro economic manner. It is a fascinating model process! Why is the Leap Model so fascinating? First, it allows clients to see their entire financial world in one view – Second, it allows them to see their financial world through a telescope as opposed to a microscope, and many-a-times, clients are able to see enormous eroding factors taking place since products and/or services purchased are inherently flawed and unless they are congruently placed in the model, they have a tremendous amount of financial leakage that can negatively impact overall financial performance. Third, the model is uniformed with financial and economic properties, and it is interactive in nature (clients see the impact of money moves in the model instantly and definitively). Fourth, the Leap Model acts as a verification tool, so it gives clients the ability to measure specific money moves with different economic structures at different times, under different circumstances, and with full objectivity measures and designs.

III. How to Achieve Financial Security in Retirement Retirement distribution planning is not about products; retirement distribution planning is not about fancy equations, derivatives, or number crunching formulas; retirement distribution planning is about a scientific process that utilizes a number of strategies and straddles in order to provide financial success. Since most of this white paper has focused on the issues and concerns with retirement distribution in the 21st Century, it is apropo for me to address proven solutions from a strategic perspective. Several years ago, when Tiger Woods was winning and dominating the game of golf on a worldwide basis, I started to use certain analogies in order to get my clients to understand retirement and distribution challenges – I would

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always open my meetings with the following question: “If you’re an avid golfer that has been invited to play the Masters, what would you rather have, Tiger Woods’ clubs or Tiger Woods’ swing? Although I have asked this question hundreds of time, I have never had a client or prospect choose the clubs…they always, always, choose the swing! Yes, the clubs are an important part of the game, but having an adequate swing with a keen ability to manage the course is paramount to golfing success. This same axiom applies to financial education and retirement planning. As I visit with many potential clients throughout the year, I notice that most of them suffer from the same issues and concerns that I have just discussed – they chose clubs (financial instruments) throughout their accumulation years. The majority of their assets are tied up in qualified plans and/or a personal residential home; they don’t know how much money they have contributed to their qualified plans (401k, IRA, SEP, etc), and most importantly, they have no clue as to what the internal rate of return (IRR) has been on those plans, yet they want to know the IRR on everything else. Additionally, they insure all of their toys for 100% of their replacement value, yet their income replacement insurance due to death or disability is normally less than 20% of their replacement value on a good day. Along the way, these potential clients are working hard to have their mortgages paid off and to hopefully live in a debt free society. Once I discuss and assess their current financial profile, I proceed to ask the following question using the below chart: During your retirement years, what percentage of your income would you like to have taxed?

Guess what the answer is 100% of the time…yes, you guessed right! They don’t want to pay taxes on any of their retirement income distributions yet their actions are diametrically opposed to what they are doing today. Again, all of the decisions made during accumulation years failed to address the most important aspects of the distribution years – many of these potential clients were making contributions to their qualified plans because they were “saving taxes”. As a matter of fact, I have had to correct a number of CPAs during the years that have

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advised me that by putting my money in a qualified plan I would be “saving enormous taxes” on a yearly basis (my CPA does not use the statement “saving taxes” with me any longer) – taxes are never saved; they are postponed. And when you postpone your taxes, you’re also postponing your tax liability, and I think we all agree that taxes will be much higher in the foreseeable future than they are today. Here’s an example of this discussion regarding the “savings” of taxes: A client contributes $500,000 over their lifetime and working years to a 401k, and the account grows to $2,000,000 by age 65. In a 25% marginal federal income tax bracket, this client “saved” $125,000 in taxes during all those years ($500,000 contribution times 25% tax bracket equals $125,000). According to the IRS and the Wall Street Journal, 85% of all qualified plans are cashed out and/or surrender at one time in a lump sum. In reference to qualified plans, please remember that you don’t have to keep track of your cost basis as you would in a Roth – why? Simply, you make money, you pay taxes; you lose money, you pay taxes; you break-even, you pay taxes…welcome to the United States and the ever increasing tax liability-plan! But more on this client…So, the client liquidates the account and now owes $950,000 in taxes to the IRS. For the client, the qualified plan investment yielded a 4:1 return gross of taxes; for the IRS, it was a 7:1 return! You see, the $125,000 of alleged “savings” was no more than a loan to the client from the IRS. Another issue that I encounter when reviewing retirement distribution accounts on behalf of potential clients is that most of the money and/or assets are located in one account or one pool. Retirement Bucket Distribution Planning is a technique I use in order to diversify annual incomes while creating a guaranteed income-laddering program. The Three-Bucket Distribution Models are designed based on income and expense distribution propensity. Here’s a holistic view of these models:

The GoGo Years (Ages 65 to 75) are exciting years for most retirees. Many of them have waited many decades in order to travel and enjoy themselves…as a matter of fact, most retirees spend more money during the GoGo Years

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than any other period in their lives. The SlowGo Years (Ages 75 to 85) are less exciting but still active years…retirees may not be doing as much traveling as they did during the GoGo Years, and health issues and concerns start to take effect on their everyday lives. Obviously, there are exceptions to this rule, and I have a number of clients that are in tremendous shape and doing things today that they couldn’t do 30 years ago. The NoGo Years are the wait and see years…I’ll see how I feel tomorrow – medical and health care issues and concerns are now consuming their everyday lives and they are living on a day to day basis, hoping to wake up on the green side of the grass daily while awaiting the ultimate calling. From a financial standpoint, the types of assets and distribution strategies are totally different between the GoGo Years, SlowGo Years, and NoGo Years…how would retirees know unless they do proper distribution and economic planning ? As I continue to review and assess potential distribution techniques, I continue to remind clients and/or potential clients that debts are seldom terminated or retired; they are just shifted from one liability to another…Yes, a mortgage may have been paid off but medical expenses (Medicare and MediGap premiums, deductibles, and cost of prescription drugs) will replace that mortgage pay-off payment in the future. As previously stated, and according to governmental statistics, the average 65 year old couple will spend approximately $220,000 in their lifetimes just to cover medical and health expenses…not a pretty sight! The role of life insurance in retirement has a tremendous strategic advantage since it allows for the creation of Retirement Distribution Straddles. These are techniques that utilize the best features and benefits of certain products in order to enhance distribution and/or guaranteed rates on other products in the portfolio. For many of my clients, life insurance has become asset insurance thus increasing retirement income, the guaranteeing of said income, and providing critical surviving benefits to spouses and/or other family members while allowing for maximum transfer and legacy strategies potential. In many ways, life insurance is like money in escrow, and escrow closes the day someone dies – in other ways, life insurance acts as a supplemental retirement plan that provides much needed tax-preferred income during retirement years. In the absence of life insurance, the average 65 year-old-retiree is held hostage to the interest only distribution model. At a 3% distribution rate of interest only, this average retiree will receive $30,000 of gross income annually and $22,500 of net after tax income on a $1,000,000 portfolio at a 25% federal income tax bracket – on the other hand, this same retiree, with the same amount of annual earned interest, on the same type of account, and the same portfolio value of $1,000,000 can receive $67,216 of gross income annually and $59,716 of net after tax income on a $1,000,000 portfolio at 25% federal income tax bracket utilizing a strategic straddle – over a 20 year period, the distribution straddle technique I used with this retiree generated 180% more in retirement income! That is true asset distribution leverage! See, retirement is not about the accumulation rate; it is about the distribution rate, and by using distribution straddles, this retiree has the ability to enjoy the use of their money along with the interest it generates on an annual basis. Distribution straddles come in several forms and sizes, and it all depends on what the retiree wishes to obtain:

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Needless to say, the above-depicted straddle techniques can reduce taxes, increase income, guarantee said income, reduce and/or eliminate stock market and interest rate fluctuations, and if done properly, it protects the retiree from the Living Too Long eroding factor previously mentioned. As Americans approach retirement, taxes and inflation become the nemesis of success, and approximately 99% of all Americans are paying more taxes than what they should be paying today – why? Just follow the Rules of Engagement for financial institutions, major corporations, and the IRS…they want your money; they wanted systematically; they want to keep it as long as possible; and they want to give it back as little as possible – Again, financial institutions have taught the American people to stay put in their investments and to allow said investments to compound on an annual basis. It has been said that Albert Einstein stated that “Compound interest is the 8th wonder of the world” - Obviously, I don’t think that Albert Einstein addressed the issues of taxation in that same statement. The proper management of taxation allows for a higher internal rate of return (IRR) without taking additional risks. By utilizing the Leap models, I have the ability to review micro-economic views and perform account deep-dives geared toward the identification of current investments, their ability to perform adequately under most circumstances, and investment return enhancements through specific tax models – in a nutshell, most Americans would want compound interest and simple tax, but unless they truly understand the taxation of products and services in this country, along with the proper usage of money in motion techniques, they will never be able to accomplish full capability and control of all taxable assets – yes, the money and/or assets compound, but so does the tax liabilities.

IV. How to Create a Tax Free Retirement Plan Our firm specializes in creating tax-free retirement plans for qualified clients in our practice – more importantly, we’re one of the very few firms in South Florida that truly addresses retirement income from a risk and tax-

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advantaged perspective. As an Economics Advisor, I don’t advocate and/or give expert advise on tax matters, but we do depend on our affiliated tax partners for assistance in all tax planning objectives. Taxation in retirement can make or break a retirement plan success for many Americans today – many of the clients I encounter have most and/or all of their assets in taxable or tax deferred accounts – Ed Slott, famous CPA in the United States stated that “If you have taxable assets, you have a problem…and the problem is that you have assets that are forever taxed as opposed to never taxed”16 – Ed Slott truly understands the difference between making money and building wealth. As I engage clients in the retirement planning process, I start with Provisional Income calculations – most Americans and many financial advisors have no clue what “Provisional Income” is and how it works – By definition, “Provisional Income” includes 100% of the earnings from employment, pension plan payments, dividends and interest from regular investments, withdrawals from IRAs and 401k plans, and interest from municipal bonds (muni bonds may be received income tax-free, but they do have a negative impact on Social Security benefits taxation)17. To this, you must add 50% of Social Security benefits received in that year in order to arrive at the “Provisional Income” total. For single individual or head of household, if the “Provisional Income” is less than $25,000 for that year, Social Security benefits are not reported as income for that year. If “Provisional Income” exceeds $25,000 but is less than $34,000, then up to 50% of Social Security benefits are taxable. In excess of $34,000, then up to 85% of Social Security benefits are taxable. For married couples filing jointly, the thresholds are higher and more forgiving. If the “Provisional Income” is less than $32,000 for that year, Social Security benefits are not reported as income for that year. If “Provisional Income” exceeds $32,000 but is less than $44,000, then up to 50% of Social Security benefits are taxable. In excess of $44,000, then up to 85% of Social Security benefits are taxable. Historically, Social Security benefits18 and their taxation have become hot potatoes over the years – Here’s why:

1 . Franklin Roosevelt , a Democrat, introduced Social Security in 1935. 2. He promised that participation in the program would be totally voluntary (not) . 3 . That participants in the program would only pay 1% of their first $1 ,400 of income

into the program (today, participants pay 6.20% up to the annual increasing taxable wage base currently at $118,500 for 2016) .

4. That participants ’ contributions to the program would be tax deductible for tax purposes every year (today, up to 85% of benefits may be taxable) .

5 . That participants ’ contributions would be placed into an independent “trust fund” for the Social Security Retirement Program exclusively (under Lyndon Johnson, a Democrat, the money was moved to the “General Fund” and spent) .

                                                                                                               16  Ed Slott – The Retirement Savings Time Bomb, 2003 17  U.S. Tax Code – Publication 915 – Social Security and Equivalent Railroad Retirement Benefits  18  Social Security – A Documentary History, 2006

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6. That the annuity Social Security payments to retirees would never be taxed as income (under Bill Clinton, a Democrat, up to 85% of Social Security benefits may now be taxed) . The government giveth; and the government taketh away.

Therefore, it is critical for Americans to understand the impact of taxation in retirement, along with inflationary pressures that will attack all incomes in the future. What types of tax-free income are available in retirement, and which ones do not negatively impact Social Security benefits? Following you will find available tax-free incomes in retirement:

As you can see, there are only 4 vehicles under the IRS code that allow for tax-preferred retirement income – Out of the 4, only 3 allow for “Provisional Income” exemption:

Although municipals bonds may be received tax-free in residential states, the income generated from municipal bonds is included in “Provisional Income” calculations.

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As you can see, a successful retirement plan requires the understanding and application of Economic principles - this is what my firm and I do! As an Economics Advisor, I understand that methods are many, and principles are few; methods are always changing; yet principles never do. The Tiger Woods analogy applies to retirement Economics now more than ever – retirement success is about strategic design, economic straddles, taxation and inflationary control, income guarantees regardless how long someone may live, risk reduction and/or risk avoidance, transferring longevity and volatility risk to a 3rd party pool of risk managers, Provisional Income calculations years before they are implemented, survivor benefits and guarantees, netting, flattening, and pay-downs in order to reduce the negative impact of compound taxes, creating distribution buckets that address the GoGo Years, SlowGo Years, and NoGo Years of expenditure propensities, and last but not least, living your life away from scarcity and lowest common denominator type living. In summary, Americans need to be able to live and enjoy their wealth, but by the same token, they must have legacy generational planning strategies in order to satisfy the needs, goals, and objectives of the family unit – The rich are always planning and thinking two or three generations down the line; the poor only think about their minimum needs while forgetting the family unit enhancement planning altogether ! As an Economics Advisor, I assist my clients in changing the way they see things, because when they change the way they see things, the things they see change.

Bert Salazar, Managing Member Cambridge Financial Partners, LLC 2000 Ponce De Leon Boulevard, Suite 500 Coral Gables, FL 33134

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Bibliography:  1  Genworth Cost of Care Survey 2015 2  Lifetime Economic Acceleration Process (Leap) 2005 Leap Systems, Inc. 3  Fidelity Investments, “How to tame retiree health care costs”, May 2013 4  Medicare 2014 and 2015 costs at a glance. http://www.medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-a-glance.html 5  1999, Association for Financial Counseling and Planning Education 6  Executive Order 13530 – President’s Advisory Council on Financial Capability, January 29, 2010 7  U.S. Debt Clock.org 8  Fix the Debt – Info@Fixthedebt.org 9  2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds 10  U.S. Debt Clock.org  11  The U.S. Deficit and Debt – David Walker in, Comeback America 2010 12  The Decline in Savings – Barry P. Bosworth, The Brookings Institution 2012  13  1999, Association for Financial Counseling and Planning Education 14  Lifetime Economic Acceleration Process (Leap) 2005 Leap Systems, Inc. 15  Lifetime Economic Acceleration Process (Leap) 2005 Leap Systems, Inc. 16  Ed Slott – The Retirement Savings Time Bomb, 2003 17  U.S. Tax Code – Publication 915 – Social Security and Equivalent Railroad Retirement Benefits  18  Social Security – A Documentary History, 2006