Wealthy and Wise® Logic Report

Executive Summary

To be credible, any form of wealth planning must be capable of addressing the following issues:

  • Real wealth involves sustainable Cash Flow, and most people are more concerned with running out of money than any other financial issue.
  • An effective wealth planning program must have the capacity to:
    1. Gauge the financial impact on long-range Net Worth of a client’s specific, year-by-year, required after tax Cash Flow (including a factor for inflation);
    2. Calculate the most efficient distribution from liquid assets to produce the required Cash Flow;
    3. Convert illiquid assets to liquid assets at any time a shortfall of required Cash Flow exists;
    4. Calculate Net Worth using realistic asset-by-asset client assumptions (after accounting for required Cash Flow);
    5. Illustrate revisions to the asset mix to improve Cash Flow and maximize Net Worth;
    6. Include special gifting strategies for clients wanting to support charitable institutions;
    7. Maximize Wealth to Heirs in coordination with the most efficient pre-death Net Worth;
    8. Illustrate varying levels of death taxes due to the unstable nature of federal estate taxes;
    9. Analyze all planning variations in “do-it-versus-don’t-do-it” graphical comparisons;
    10. Provide year-by-year numerical backup for every aspect of the analysis so that professional advisers can easily audit any aspect of it.

There are many narrow gauge issues addressed by specialty programs (retirement planning, pension analysis, asset allocation, estate taxes, and charitable giving, to name just a few), and these programs retain their importance; however, effective wealth planning only takes place when the recommendations from these focused programs are integrated into an overall analysis containing the features noted above. This is because the key determinant of the effectiveness of any analysis must always be don’t run out of money before you run out of time, and it is impossible to measure the impact of a narrowly focused recommendation on Cash Flow and Net Worth without integrating it into an overall plan.

For the client reading this Summary: Most advisers do not offer this type of analysis, but every single-issue financial strategy you consider must be looked at in this manner because you don’t want to run out of money before you run out of time. Once you establish your initial Wealthy and Wise base line, it will be simple to “test drive” any new financial consideration through the model to gauge its impact on your Cash Flow, Net Worth, Wealth to Heirs, and in many cases, Wealth to Charity.

For the marketing and compliance officers of financial institutions: The suitability of recommendations is not complete unless they are evaluated within the context of a Wealthy and Wise analysis.

For the planning specialist reading this Summary: If you are not using Wealthy and Wise logic, you should hope your competition isn’t either.


Detailed Analysis

Real wealth involves sustainable Cash Flow, and most people are more concerned with running out of money than any other financial issue: Net Worth certainly has value, but the amount of sustainable after tax Cash Flow that can be produced from Net Worth is the real measure of wealth. Also keep in mind that the invasion of Net Worth to provide an unrealistic level of Cash Flow is bound to end up producing no Cash Flow at all. How are people to know? A Wealthy and Wise analysis tells the story as shown in the following graphic.

Logic of Wealthy and Wise - Detailed Analysis Graph

Male 65; Female 60

$3,000,000 in Liquid Assets Available to Provide Retirement Cash Flow

Annual After Tax Cash Flow:

Strategy 1: $100,000

Strategy 2: $150,000

Strategy 3: $200,000

As you can see from the Strategy 3 flag pointing to zero, $200,000 in Cash Flow produces a mid-range disaster as the liquid assets producing Cash Flow disappear at ages 85/80. Strategy 2 hangs on longer, but it eventually dissipates as well. Strategy 1 more than supports its level of Cash Flow and also provides for a substantial inheritance for heirs.

This analysis also calculates that Strategy 1 can support $29,000 in additional annual Cash Flow with Liquid Assets never dropping below their starting point of $3,000,000. The $29,000 can be used for: 1) additional retirement Cash Flow; 2) gifts to heirs; 3) funding deductible gifts to charity in the amount of $42,000 (31% tax bracket assumed); or 4) a combination thereof.

Every individual contemplating retirement (or any other scenario that requires Cash Flow) must be certain to determine the sustainable level of Cash Flow that a given level of liquid assets will provide. In addition, a valid analysis must also illustrate the conversion of some or all illiquid assets (if present) to liquid assets whenever a shortfall of Cash Flow occurs.

Only a Wealthy and Wise analysis has the capacity to illustrate these critical scenarios.

Distribution Logic is Critically Important

Matthew and Catherine Fox, age 65/60, 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%) (cost basis: $750,000)
$    750,000 Matthew’s IRA -- assumed yield: 8.00% (mgt. fee of 0.80%)
   900,000 Catherine’s IRA -- assumed yield: 8.00% (mgt. fee of 0.80%)
$ 5,333,333 Total

Matthew and Catherine want $200,000 a year in after tax retirement cash flow compounding by 3.00% for inflation. Imagine it is the first day of the first month of retirement. They need $16,667 (200,000/12) for the first month. From which account should they take it -- and does it make any difference?

It makes a significant difference. The order in which liquid assets are accessed for cash flow should be prioritized in order to produce the highest possible long-range Net Worth. This is generally the most overlooked aspect of wealth planning. Let’s provide the desired cash flow but compare the least efficient withdrawal order (“Bad Logic”) to the most efficient (“Good Logic”).

Bad Logic vs Good Logic

Comparing the two strategies, below are the Net Worth results for Matthew and Catherine. We’ll refer to the most efficient Good Logic as “Strategy 1” and the least efficient Bad Logic as “Strategy 2”.

Least Efficient Bad Logic - Strategy 2

In this example, there is a 49% increase in long-range Net Worth using the most efficient distributions. It is clearly a major component of effective wealth planning.

Informed Decisions Require A Comparative Analysis

The reason many single-issue recommendations are never implemented is because the planner neglects to include the impact of the recommendation on a coordinated evaluation of Cash Flow and Net Worth.

Sometimes it seems there are only two kinds of prospects for long-term care insurance: Those who can’t afford it and more affluent candidates who can -- but resist spending the money thinking, “I’ll just self-insure it.” Next time you run across the latter objection, ask this question: “Would you like to know mathematically whether self-insuring is a valid option?” Most affluent people will want to hear what you have to say. Here is an example:

Assumed Client Data

Couple: Age 65 and 60
Net Worth: $3.6 million
Desired After Tax Retirement Cash Flow: $100,000 indexed at 3.00%


  • A claim occurs in 8 years for one of the insureds that lasts for 6 years, after which death occurs.
  • The total benefit for the claim on a monthly basis is $6,000 in today’s dollars -- and medical inflation averages 5% a year.
  • The annual premium for a Long-Term Care policy with an inflation rider covering both individuals is $12,000 -- reducing to $6,000 during the claim period.
  • The inflation rider increases total monthly benefits by 5% (compounded) a year.
  • Retirement cash flow needs decline by 25% during and after the claim period.

Let’s compare three scenarios:

  1. No coverage purchased and no claim costs assumed.
  2. No coverage purchased and claim costs paid via withdrawals from Net Worth.
  3. Coverage purchased and paid via withdrawals from Net Worth.

Hold on to your hats. Here are the results using InsMark’s Wealthy and Wise.


Informed Decisions Require a Comparative Analysis

Why is buying the LTC insurance the most efficient option? Remember this assumption? Assume retirement cash flow needs decline by 25% during and after the claim period. Each client’s situation will require different assumptions, but in this case, it’s simple mathematics -- the present value of the reduction in retirement cash flow more than offsets the present value of the cost of the premiums for the Long-Term Care policy.

This logic also makes self-insuring slightly more efficient than doing nothing -- but the insurance option is the winning strategy by a large margin.

Maximizing Net Worth and Wealth to Heirs

Different income-producing assets produce Cash Flow in various forms and yields. A methodology is needed to determine the most efficient use of various assets in order to produce the required after tax Cash Flow while simultaneously maximizing Net Worth.

For example, concern often exists about the quality of the tax deferred funds contained in an IRA, 401(k), or Keogh. Tax deferral is great, but the death tax can be staggering since it can combine income and estate tax. This often causes these accounts to be the target of what many call “pension predators” who recommend various financial alternatives funded by withdrawals from tax deferred funds.

Let’s review this in some detail.

Harry and Angela Dorsey are age 55 and 50 and intend to retire in five years. They have $800,000 in an IRA as part of their current liquid assets of $4,000,000. Assume they want $100,000 in today’s dollars in after tax retirement Cash Flow indexed for annual inflation at 4%.

Examine the following graphic:

Maximizing Net Worth and Wealth to Heirs

Strategy 1 illustrates the withdrawal of money from the IRA first to support their required after tax Cash Flow, and it reflects incredibly poor advice -- yet “IRA first” is a common planning recommendation.

Strategy 2 illustrates the withdrawal of required minimum distributions only from the IRA and, compared to Strategy 1, this procedure enhances their long-range Net Worth by over $3,500,000.

Only Wealthy and Wise evaluates and compares these two alternatives within the context of Net Worth and, as you can see below, Wealth to Heirs.

The poor results of Strategy 1 are carried over to the Dorseys’ heirs. The planner who makes the “IRA first” recommendation to the Dorseys is, through bad advice, confiscating over $2,600,000 in long-range Wealth to Heirs.

Strategy 1 vs Strategy 2 - Maximizing Wealth to Heirs


Adjusting Net Worth in Favor of a Charity Without Penalizing Wealth to Heirs

Continuing with the Dorsey analysis, an IRA (and any other tax deferred account, e.g. 401(k), Keogh, tax deferred annuity) is heavily taxed at death -- in some cases, as high as 80% counting both income and estate taxes.

As a result, many charitable commentators recommend leaving an IRA to a charity at death so no such taxes are imposed -- and replacing the value of the tax deferred asset to heirs with tax free life insurance owned by a wealth replacement irrevocable trust (formed on behalf of heirs).

The proceeds of life insurance funded in this manner are not subject to income or estate taxes.

If the Dorseys change the beneficiary of the IRA to their favorite charity to take effect only after they both die, 100% of the residual value of the IRA is preserved for a favorite charitable cause. Prior to death, the asset remains an accessible liquid asset available to the Dorseys.

Note: They can change the beneficiary of their IRA as frequently as they desire at any time prior to death.

Strategy 3 (a so-called “Charitable IRA”) produces the comparative results shown below. A $2,000,000 life insurance policy with an increasing death benefit has been injected into Strategy 3 with the wealth replacement irrevocable trust as policy owner and beneficiary.

Gifts to the trust to fund the policy’s annual premium of $18,000 have been added to the Cash Flow requirements of Strategy 3 – and funded by way of asset withdrawal.

Let’s see how this affects Net Worth and Wealth to Heirs.

Net Worth - After Providing Required Cash Flow

For the arrangement to be acceptable, the Dorseys must have a strong charitable motivation and must also be able to tolerate the reduction of their long-range Net Worth (caused by the additional Cash Flow required for the gifts to the trust).

3 Strategies - Graph 2

Strategy 3 produces a significant improvement in Wealth to Heirs. Strategy 3 also produces a long-range gift to charity in excess of $2,500,000.

Strategy 3 - Graph 3

Without a Wealthy and Wise analysis, the Dorseys would have great difficulty in gauging the impact of this particular approach in the context of their overall Cash Flow, Net Worth, Wealth to Heirs, and Wealth to Charity.

Below is another way to look at the results.

Strategy 3 - Alternate View of Results


Conclusion: With the growing commoditization of financial products, some financial advisers increasingly tend to recommend products and strategies in a vacuum instead of integrating them into an overall plan. The analytical process described in this report is the only mechanism that allows a client to evaluate a recommendation in the comparative context of its overall impact on Cash Flow, Net Worth, Wealth to Heirs and, if part of the consideration, Wealth to Charity. Acting on any financial recommendation that is not integrated in this fashion should be delayed until such an evaluation occurs and satisfactory conclusions are reached. Wealthy and Wise is not necessarily designed to replace other financial software programs; however, once any program generates a recommendation, planning is not complete until that recommendation becomes part of a Wealthy and Wise analysis.

Note:   Wealthy and Wise also has the capacity to reflect the so-called “stretch-out” option which provides that the residual values of an IRA can be inherited by the next generation with its income tax deferred status intact until heirs make the required withdrawals.

Note:  Information in this report is educational, and comparative data is hypothetical. 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.

Wealthy and Wise is designed and published by InsMark, Inc., San Ramon, CA. For more information or to license the software, go to Wealthy and Wise or contact Julie Nayeri at 1-888-InsMark (467-6275) or julien@insmark.com. For information about corporate accounts, contact David A. Grant, Senior Vice President - Sales, at 1-925-543-0513 or dag@insmark.com.


IRS Circular 230 Disclosure

The following statement is required by IRS regulations:  In order to comply with requirements imposed by the IRS which may apply to this document (including any attachments, enclosures, or referred material) as distributed or as re-circulated, please be advised that the material contained herein is not intended or written to be used, and it cannot be used, by anyone for the purposes of avoiding any penalty that may be imposed by the Internal Revenue Service under the Internal Revenue Code.  In the event that this document (including any attachments, enclosures, or referred material) is also considered to be a “marketed opinion” within the meaning of the IRS guidance, then, as required by the IRS, please be further advised that the material contained herein is written to support the promotions or marketing of the transactions or matters addressed by the material contained herein, and, based on the particular circumstances, you should seek advice from an independent tax adviser.


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