Using Business Interruption Insurance to Protect Your Income

Picture it now…

You own a thriving art supply store in your home town of New Orleans. You’ve put years of your life and thousands of dollars into building the store into what it is now. You make a nice living, and the business mostly runs itself at this point.

Then Hurricane Katrina comes to town. The building you lease is ruined. Your storefront and merchandise are ruined. You have no cash flow to pay creditors, and are forced to close the store.

This is a pretty extreme example, but is exactly what happened to thousands of businesses in the wake of the disaster in 2005. It’s also a risk that can be completely covered with business interruption insurance.

Virtually any disaster that is out of your control and risks your business’s profitability can be covered in a business interruption policy. In other words, you can protect business profits and your personal income from a fire, flooding, earthquake, or other disaster.

This post will cover the ins and outs of business interruption insurance. We’ll address what it does and doesn’t cover, when you should consider buying it, how much coverage you need, and how to purchase a policy.

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How to Hire an Accountant

Managing your financial affairs is a big job. You have to keep track of your income, manage your assets for long term growth, pay taxes, and arrange for your estate to be distributed after you die.

You can do some of these things on your own. But others, like writing a will, are jobs you’ll probably want to hire a professional for.

Since we’re in the middle of tax season, I thought it might be helpful to cover exactly what to look for when hiring an accountant. Paying taxes is a fact of life. But if you can find creative ways to reduce the amount of tax you pay, there will be more left over for you and your family. It’s for this reason that an accountant is often one of the professionals families hire for money advice.

You can certainly prepare your own taxes if you prefer. Programs like TurboTax and TaxAct provide quick and affordable ways to compile your financial records and file your taxes.

There is no program that can help you with tax planning, though. TurboTax and TaxAct are great for tax compliance, where you’re reporting on transactions that’ve already happened. But if you’d like to know how you might reduce your tax burden in the future, you’ll need some help making decisions on transactions that haven’t happened yet. This is tax planning, and something that many accountants are very good at.

I covered in a recent post how you can tell whether you need to hire a CPA. Today’s post will cover how to go about hiring one if you do.

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Entrepreneurship as a Means to Financial Independence

Today’s post is another on the topic of financial independence. We’ve had several of these recently, but since that’s the focus of this blog I guess that’s not surprising.

Rather than discuss the fundamental components of financial planning like insurance or investing, today’s focus is entrepreneurship. Specifically, how entrepreneurship can be a wonderful way to align your career with your lifestyle and become financially independent on your own terms.

Forewarning: today’s post is another that falls on the philosophical side of the spectrum. I normally don’t write too many of these posts, and realize there’s already been several to start the year. Read on if you’re OK indulging my abstract (and possibly poor quality) musings.

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Money-Centered vs. Happiness-Centered Living

Today’s post is going to fall a little more on the abstract side of the spectrum. To date, most of the posts you’ll find on Above the Canopy are somewhat technical, and oriented toward achieving financial independence.

But for many thousands of people in America, the traditional career trajectory (working for 30-40 years until fully retiring around age 65) is a poor fit for their values. The pursuit of financial independence often compromises the important parts of our lives, leaving us overworked and unhappy.

So in today’s post I’ll examine the difference between money-centered and happiness-centered living. We’ll cover what we actually need to be happy, and the role money plays in fostering a happy life. Finally, we’ll cover how you can arrange your finances to support a life focused on happiness & fulfillment. If you’re up for a “deeper” post and don’t mind me waxing philosophical, read on!

Traditional Financial Independence

Usually when we hear about financial independence, it’s used in the context of having enough assets to live off of comfortably. Whether they produce enough income to fully cover our living expenses, or the withdrawals from principal are small enough that we’re confident we’ll never run out of money, the idea is the same. Financial independence means we’re no longer beholden to employment, since we could live off our own assets if we wanted to.

This idea of financial independence also fits pretty nicely with our traditional view of retirement here in America, where there’s a stark contrast between “working” and “being retired”. Our working years start when we first enter adulthood. While we usually don’t have much to our name, we do have (hopefully) some ambition and a few skills we can use to earn a living. We go out and market these skills to potential employers and eventually get a job. If we’re lucky, it’s work that’s interesting to us and pays a decent wage.

Once we start our working years we begin to collect paychecks every other week, which we use to pay taxes, rent, and other living expenses. After the bills are paid we use anything left over to pad our retirement accounts, bank accounts or both.

At this point we’re in the phase of life affectionately known as the accumulation phase. We earn an income, use it to pay our living expenses, and save whatever is left over. Our savings grow with each paycheck, and our net worth accumulates over time.

We invest our savings in order to accelerate growth, and sooner or later we reach the holy grail – financial independence. If we wanted to, we could discontinue our employment and use income and withdrawals from our savings to pay our living expenses. We’re no longer reliant on our job for income. We can do whatever we want. We’re financially independent.

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401(k) Auto Rollovers: A Convenient Safe Harbor for Small Business Retirement Plans

OK – with a new year upon us it’s time to clean up that rusty old 401(k) plan at your small business….right? Let’s say that you work in or own a small business, and are responsible for operating the company’s 401(k) plan. To put it lightly, it’s probably a massive nuisance.

401(k) plans can be a wonderful benefit to your employees AND a great opportunity for you to put more money away for retirement in a tax deferred account. But as you may now, operating a plan can be a real bear.

I’ll be covering the finer points of operating small business retirement plans throughout the year. Today’s post will focus on what to do with departed employees. Employees will come and go to and from your business over time (hopefully not too often), and it’s not uncommon for them to leave money they’ve accumulated in your company’s qualified retirement plan.

ERISA & Fiduciary Responsibility

As you probably know, departed employees always have the opportunity to pull their money from your plan after they leave, either directly or via a trustee to trustee rollover. But many employees neglect to do so. Whether it’s because they don’t know how, don’t care, or are simply lazy, it’s very common for departed employees to “accumulate” in your 401(k) plan, long after leaving the company for greener pastures.

As you also know, as the sponsor of a qualified retirement plan you have certain fiduciary responsibilities when it comes to managing the plan on behalf of your participants. It’s for this reason – fear of repercussion – that many sponsors feel stuck when it comes to managing assets of employees who long ago left the company.

Fortunately for you, ERISA was not written with the sole intention of making your life hell. There are six safe harbors written into the law that free you from fiduciary responsibility if you follow a few step by step instructions. And one of them conveniently covers departed employees.

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The Ultimate 7 Step Checklist For Hiring a Financial Advisor

A few years back, I had a friend approach me at a BBQ. He had some questions about how his financial advisor was managing his accounts.

Friend: “Yeah, I just don’t know if this guy is doing the right thing for me. We talk every now and then, he seems like a nice guy, but my portfolio hasn’t really gone anywhere.

Plus, every time we chat he has some brand new investment idea he tries to sell me on. And every single time, he talks up his new idea like it’s the Michael Jordan of portfolio management. (My friend is a big NBA fan). His ideas sound good….I’m just not sure I’m in the right situation. I feel like there’s more going on behind the scenes that I don’t see, but I don’t know what questions to ask.”

Me: “Well how did you find him?”

Friend: “A coworker recommended him. Said the guy made him a ton of money a few years ago.”

Me: “How are you paying him?”

Friend: “Well, I’m not really sure. Everything gets wrapped through the account somehow.”

Me: “OK. Let’s take a step back. Maybe it’d help to identify what you’re looking for in an advisor. If you were starting fresh, what would you like an advisor to help you with?”

Friend: “Hmmm. I guess manage my money and help it grow, make sure I’m on track for retirement, and make sure I don’t run out of money after I stop working.”

Me: “So if you were starting from scratch, what qualities would you look for in an advisor? What criteria would you use?”

Friend: “I really have no idea. I’ve never thought of it that way. Plus there’s about a million financial advisors around here, I get information overload. I guess I’d go with someone I know and like, and seems to have a good reputation. What should I be looking for?”

I had to think about my friend’s question for 10 seconds or so. At the time, I was working at Charles Schwab, but strongly considering starting my own firm.

Me: “I think if I were looking for an advisor, I’d try to find someone who’s competent, trustworthy, unbiased, enjoyable, and looks after for my finances for a fair and transparent price.”

Friend: “Whoa whoa whoa. Slow down with the laundry list. That’s a whole lot of stuff I don’t understand. It sounds GOOD though. I need to tend the grill, but let’s reconvene in a few minutes.”

Coincidentally, this was one of the very reasons I was considering starting my own firm. There are about 300,000 professionals in the U.S. today who call themselves “financial advisors” or “financial planners.” But in my opinion, only a small portion of them have the qualities and service model I’d look for in an advisor.

I’ve had this question come up many times in the years since, and my friend isn’t the only one who’s not sure how to evaluate a potential advisor. And without knowing what questions to ask, how can you be sure you’re finding someone trustworthy and competent?

Because of this, I thought it’d be helpful to build a checklist you can use to evaluate financial advisors & planners. If I were looking to hire someone for help with my finances, these are the exact qualities I’d look for and the exact criteria I’d use. And at the very least, hopefully you’ll be armed with a few good questions to ask.

Click here to download the Ultimate 7 Step Checklist for Hiring a Financial Advisor

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How to Analyze a Variable Annuity

Ever had a variable annuity pitched to you? Maybe you own one. They’re a popular way for many people to mix guaranteed retirement income with the growth potential of equities.

But I’m guessing even if you hold a variable annuity, you’re not 100% sure how it works.

“What are the annual fees again?”

“How does that bonus period work?”

These were a few of the questions a client asked me recently when he was considering a variable annuity.

**Full disclosure – I do not sell variable annuities**

This client just wanted a second opinion. He’d recently met with an advisor who pitched him a variable annuity, and wanted input from an objective source.

My client was in a tough position. He’d just lost his father, and was about to receive a sizable inheritance. He wanted to use this inheritance to produce income throughout retirement, since he was about to turn 60.

He was skeptical about investing in the markets, fearing that another financial crisis would destroy his nest egg. At the same time, he struggled with the idea of buying an annuity. He was attached emotionally to the money since it was coming from his father’s estate, and he didn’t want to fork it over to an insurance company. On top of that, the annuity he was considering was complicated and confusing, and he was feeling a little lost.

After walking through everything together, my client decided to use some of his inheritance to purchase an annuity – but not the one he was being pitched. He opted for a fixed rather than a variable annuity, which he bought with a small portion of the money from his father. He decided to invest the majority of the money in a diversified portfolio geared to produce income.

My client isn’t alone, and I get a lot of questions about variable annuities. Since they have so many moving parts, I wanted to share exactly how I analyze variable annuities using my client’s contract as an example.

There’s a lot of nonsense floating around the internet when it comes to annuities. Hopefully this framework is useful to you if you’re considering buying one.

American Legacy Annuity Analysis

In this video, I’ll analyze the American Legacy variable annuity offered by Lincoln Financial Group, which my client was considering. This specific contract is the American Legacy Shareholder’s Advantage annuity, with the i4LIFE Advantage Guaranteed Income Benefit. I’ll also assume that the Enhanced Guaranteed Minimum Death Benefit (EGMDB) is chosen.

Framework: How a Variable Annuity Works

Before we discuss how to analyze a variable annuity, let’s take a step back and review how they work & where they came from.

Variable annuities have become very popular in the retirement planning industry over the last 25 years. Essentially, they’re a contract between you and an insurance company that guarantee you a series of payments at some point in the future.

There are two phases in a variable annuity: the accumulation phase and the payout phase. What’s unique about a variable annuity is that you invest your contributions during accumulation phase – hence the term “variable.” These investments are known as sub accounts and behave a lot like mutual funds. They are professionally managed and will follow a specific investment strategy described in a prospectus.

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6 401k Trends for 2016

Now that we’ve turned over the calendar to 2016, I thought it might be helpful to take a look at current 401(k) and 403(b) trends across the country. The marketplace is continuously changing, and 401(k) and 403(b) sponsors can maintain competitive and low cost plans by keeping current.

Six 401k Trends for 2016:

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5 Ways to Get Lower Rates On Unsecured Business Loans

Borrowing money is a way of life for most entrepreneurs and business owners. I recently read that 80% of businesses rely credit to finance their ongoing operations.

Entrepreneurs often don’t have many options when it comes to procuring credit. And any time you don’t have collateral to put up against a loan, you’re venturing into the unsecured business loan market.

Many small business experts advise against taking out an unsecured business loan. The rates are high and the terms can be kryptonite to your bottom line.

But for many of us, unsecured business loans are our only option. If you ever find yourself in this situation, this post will cover 5 ways to improve your rate on unsecured business loans.

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What No One Is Telling You About Long Term Disability

When someone mentions the word insurance, most of us think of one of three things:

Aaron Rodgers doing a discount double check
The GEICO Gecko using his British accent
The coverage we carry on our cars, our home, our health, or our life

What most of us don’t think of is our long term disability coverage.

Since tangible assets like our cars and homes are easy to visualize, they’re often top of mind when it comes to insurance protection.

But what about the risk that we get sick or injured, and can’t work?

Long term disability insurance is meant to replace our income if this happens. And coincidentally, our ability to earn a living is probably our biggest and most overlooked asset.

Earnings Capacity

Let’s take a moment to think about your ability to earn a living. Just imagine for a moment what your lifetime earnings will look like.

Your lifetime earnings includes every single paycheck you earn throughout your entire career. It counts every single raise, every single promotion, and every single bonus.

When you add them all together you’ll get a massive number. It will be far bigger than the value of your home, your car, and probably your retirement nest egg.

Your ability to go out into the work force and earn this money is your earnings capacity.

Now Imagine It’s Gone

Many people consider the possibility that they die, and the impact that would have on their family. But what if you were hurt or sick and unable to work?

Your family would be left with monthly expenses like a mortgage, utilities, and grocery bills. They’d also be left without your steady paychecks to afford them.

Plus there’s a chance you might need additional help from a caretaker if you’re permanently disabled. The end result? Higher expenses, lower income.

It’s More Likely Than You Think

If you’re thinking “that’ll never happen to me,” the statistics would disagree with you.

The social security administration says that 1 in 4 of today’s 20 year-old’s will become disabled for some period of time before they retire.

And if you’re under 45, the chances that you become disabled are far, far greater than the chances that you die.

Let’s Think About This

Our earnings capacity is our biggest and most important asset
Becoming disabled is far more likely than we realize
Losing our earnings capacity could cause our family severe hardship

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