I’m no Harvard economist, but I do try to keep an ear to the ground as part of my business. And I believe I see a potential financial perfect storm coming in 2008, which will be quite unique in our most recent economic history. As I often do, I’ll borrow a metaphor from “The Last Chance Millionaire,” written by my friend, Douglas Andrew. In describing the three “lodging places” for investment funds in America, Doug refers to the real estate market as the “House of Sticks,” with a moderate risk of loss for investors, the stock market as a “House of Straw,” with the highest potential for risk, and banks and insurance products as the “House of Bricks,” with guarantees and the least level of risk. Now certainly there’s a million variations of how to play these three for sophisticated investors, no matter what directions markets take. They’ll be okay no matter which way the wind blows. But I do so worry about the rest of us that make up the bulk of the baby boomers, fast approaching their retirement years with maybe $100,000 in their 401(k) a drop in the bucket and their equity in their home as what was, until recently, their most aggressively performing investment, now drifting back out to sea. Most of us still have our heads down trying to make an income for the next 10 years, let alone having spare hours to sharpen our investment timing skills for the turbulent markets ahead. You see, in the past, you could almost predictably make a play back and forth between real estate and the stock market and it seemed that they just about always were great money makers, but roughly reciprocal to each other. You could almost count on it. And when you couldn’t count on it, funds fled to the House of Bricks, i.e. bank CD’s and money markets. Today though, with no easy fix on the credit market to buoy real estate, and every attempt the Fed makes to stimulate the economy weakening the dollar, I see no clear reason for either the stock market to zoom off in the near future nor for real estate to come back hard. Another great concern I have is that we’ve got some compelling pressures looming in the distance to raise marginal income tax levels across the boards to manage the debt and thereby fortify the dollar. But there’s a sure tightrope big national deficit weakens the dollar, raise taxes to pay the debt, and thereby kill the economy, while decimating the boomer’s IRA and 401(k) taxable withdrawals. It sums up this way for 2008: 1) The real estate market is falling fast, along with the potential retirement wealth that Boomers and GenXers thought they would be able to tap to aid their retirement. 2) The stock market could go anywhere, but is likely to be volatile for some time to come, and/or we may just be looking at a slow growth a la the 1970’s. 3) If the deficit keeps rising upward to cover Boomer Social Security and Medicare needs, the dollar could continue to weaken and Asia or Europe will rule. 4) Just as Boomers seriously enter retirement, if the debt is to be mitigated, expect to see some serious increases in income tax levels. I say all this because our firm has routinely employed a safe, passively-managed stance that we believe negotiates the coming waters with peace of mind. It would be unfair not to share it. It’s not for everyone, nor is it perfect, but it is a conservative option for a lot of working people who need to preserve what equity value is left in their homes or other properties. If your advisor has read Andrew’s “Last Chance Millionaire” and follows it precisely, they should be able to implement it for you. First, remove every bit of equity from your properties that you can, before the rest of it floats out to sea. It could be 10 years before you’ll get it back if you don’t do this now. Second, the repositioned “cash” must grow in a tax-free environment, to help give you a conservative spread over the largely tax-deductible cost of the mortgaged funds. In our offices, we customarily engineer life insurance products to enable the tax-free retirement income benefits, but be sure to ratchet down any internal insurance costs to a bare minimum with the lowest allowable death benefit. Third, the insurance products open the door to two well-hedged crediting methods that fit the uncertain future: products that offer 140 percent of the annual performance of the S & P; 500, but lock-in annual gains against loss with minimum guarantees; and products that follow the Hang Seng, Eurostox, and S & P; 500 index for five years, and credit a weighted return proportionately (75 percent/25 percent) from the top performing two of these indices, and throw out the worst, all in hindsight at the end of the five years. What this effectively does is perpetually harvest returns from either the House of Straw (stock market) or the House of Sticks (real estate), should there be any growth at all, and then locks it into the House of Bricks with minimum guarantees against future loss of those gains wherever they are made. Therefore what the markets giveth they can not taketh away. It’s a tax-free, conservative approach, if properly implemented. Bruce M. Weide is the author of “Getting Rid of Taxes in Business and Retirement;” co-host of KRLA’s “Straight Talk Real Estate;” and President of Tax-Free Benefit Specialists & Insurance Services. He can be reached at [email protected] or by calling (818) 249-7249.
